Gil Luria, Managing Director and Senior Software Analyst at D.A. Davidson highlighted Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) subsidiary Google's competitive advantage in the data center sector, emphasizing the company's in-house chips, which are second only to NVIDIA Corp (NASDAQ:NVDA) in terms of performance.

What Happened: During a discussion on CNBCOvertime, Luria pointed out that Google's cloud division has seen its margins improve from 11% to 17%, driven by revenue growth from 29% to 35%. He noted that the true return on investment depends on whether customers can develop valuable products that justify the expansion of data centers.

Alphabet has invested heavily in data center infrastructure and custom in-house chips, a strategy that Luria points out is cost-effective and, importantly, differentiates Google from key competitors. "Their in-house chips are second only to Nvidia, which gives them a big cost advantage," Luria noted

According to Luria, Alphabet's growing emphasis on these custom chips is integral to its overall competitive position in the hyper-scale cloud market, where it currently competes alongside industry leaders Amazon Web Services (AWS) and Microsoft Azure.

"The actual ROI depends on their customers. Are their customers going to build valuable products that justify the continued buildout of the #datacenters?" DA Davidson's @gilluria on $GOOGL. "Their in-house chips are second only to $NVDA which gives them a big cost advantage." pic.twitter.com/zZKy15MzoG

— CNBCOvertime (@CNBCOvertime) October 29, 2024

Why It Matters: Google's recent financial performance underscores its strategic growth. In its third-quarter earnings report, Alphabet reported a 15% year-over-year revenue increase to $88.27 billion, surpassing expectations. The cloud division's 35% growth highlights the momentum within the company.

Meanwhile, Microsoft Corp has accused Google of orchestrating lobbying campaigns against its cloud business, indicating the competitive tensions in the cloud computing sector. This rivalry underscores the importance of Google's advancements in chip technology and cloud services.

Additionally, Google's reported Project Jarvis initiative reflects its commitment to advancing AI-powered web browsing capabilities, further enhancing its technological edge.

Price Action: Alphabet Inc Class A shares closed at $169.68 on Tuesday, up 1.78% for the day. In after-hours trading, the stock rose by an additional 5.80%. Alphabet Inc Class C shares ended the day at $171.14, climbing 1.66%. After hours, the stock advanced a further 5.89%. Year to date, Alphabet Class C shares have risen by 22.63%, according to data from Benzinga Pro.