Dan Niles Still Backs Alphabet and Meta. The Cloud Number Says Why

Dan Niles, founder of Niles Investment Management, says he still likes Alphabet and Meta Platforms. His reasoning comes down to two data points. Google Cloud grew 82%, and Meta's Muse AI agent is sitting at the top of the App Store rankings.

Those aren't small things. Cloud growth at that clip means Alphabet isn't only spending on AI, it's selling it. And a consumer AI agent holding the number one spot gives Meta the kind of distribution story most of its rivals would happily trade for. Investors have noticed. Nvidia hit a record high on October 2, and it's closing in on a $6 trillion valuation, which tells you what the market is willing to pay for AI chips.

But here's the harder question, and it's the one Niles is implicitly answering. Who actually earns a return on all that spending? Buy the chipmaker and you're betting on the buildout. Buy Alphabet and you're betting the buildout turns into revenue. The question worth asking: how many of these AI capex cycles end with the infrastructure owner capturing the margin instead of the model builder?

Admittedly, the 82% number deserves some skeptics' attention. Cloud growth rates swing hard from quarter to quarter, and one print doesn't establish a trend. I'm not entirely convinced the pace holds at that level. History suggests otherwise for most high-growth segments once they scale past a certain base.

Meta's Muse is the more interesting bet, to be fair. App Store rankings are volatile by nature. But they're also a real-time signal of consumer demand, and Meta has a track record, granted a short one, of turning distribution into ad revenue at scale.

So the thesis here's simple. Alphabet gives you the picks-and-shovels angle. Meta gives you the consumer angle. Neither is a sure thing, and both are priced for a lot of good news already.

What to watch next quarter: Alphabet's cloud margins, and whether Muse stays in the top spot once the novelty window closes. Time will tell, though.