This quarter, Google Cloud accelerated to 63% YoY to $20 billion, nearly double the growth rate from three quarters ago, while the segment’s operating margin also nearly doubled to 33%. There was an enormous backlog number shared of $460 billion, which signals that demand will persist for years to come.
Perhaps more headline-grabbing was the announcement that Google plans to sell TPUs to third-party customers, marking one of the more notable challenges to Nvidia’s GPU dominance thus far. We covered this in-depth in last week’s free newsletter, which discussed why Nvidia’s 2026 is setting up to be more challenging than years’ past.
Prior to earnings, it was also announced that Google is committing $40 billion into Anthropic with $10 billion now and another $30 billion later if milestones are hit. This deal values Anthropic at a $350 billion valuation. The deal includes 5GWs of Google Cloud capacity over five years, expanding on a previously announced deal of 3.5GWs with Google and Broadcom. Notably, the earnings call also touched on Google selling TPUs direct to customers in the capital markets industry.
Cloud Accelerates to 63% while Backlog Nearly Doubles to $460B+
Google Cloud reported one of the largest sequential growth accelerations of any hyperscaler in the AI cycle. As stated, the segment’s operating margin also nearly doubled from 17.8% to 33% causing profits to triple from $2.2B a year ago to $6.6B in the current quarter.
Backlog nearly doubled QoQ in a single quarter from $240 billion at the end of 2025, to $460 billion in the current quarter. This is on top of 55% growth in Q4. This suggests that customers are willing to sign multi-year commitments. However, some of this is Anthropic, which may be causing a surge in one quarter despite the deal being longer-term. Here was the recent announcement from Anthropic: “We have signed a new agreement with Google and Broadcom for multiple gigawatts of next-generation TPU capacity that we expect to come online starting in 2027.”
To be balanced, it’s important to note that capex is up 107% this quarter from $17.2B to $35.7B. Therefore, capex continues to outpace Google Cloud growth. Many of the AI gains are also seen in Search, of course, which posted growth of 19% – representing a nice acceleration of 2 points. The two-point and three-point acceleration each quarter has been consistent for many quarters, showing the far-reaching effects of AI: “Turning to Search. AI continues to drive search usage and queries are at an all-time high.”
And another more broad update on the impact of AI across Google’s businesses:
“Cloud accelerated again this quarter due to strong demand for our AI products and infrastructure. Revenue grew 63%, exceeding $20 billion for the first time and our backlog nearly doubled quarter-on-quarter to over $460 billion. Gemini Enterprise is seeing tremendous momentum with 40% growth quarter-over-quarter in paid monthly active users. In subscriptions, this was our strongest quarter ever for our consumer AI plans, primarily driven by adoption of the Gemini app. Overall, the number of paid subscriptions has now reached 350 million with YouTube and Google One being the key drivers. And our AI models have great momentum. Our first-party models now process more than 16 billion tokens per minute via direct API use by our customers, up from 10 billion last quarter.”
As we consider the large backlog increase to the $460 billion, it was mentioned later that about half will convert over the next 24 months:
“Yes. So the backlog, the TPU hardware agreements that Sundar referenced in his prepared remarks are reflected in our cloud backlog of the $462 billion. Although the majority of the backlog is still GCP agreements. Now as you think about the total backlog, just over half of it will convert to revenue in the next 24 months. And the TPU hardware sales more specifically, we expect a small percent of them to see coming through as revenue later this year and then the majority to be realized as revenue in 2027.”
April was a Big Month for TPUs
Last week at Cloud Next, Google unveiled TPU v8 in two configurations, including the 8T that is optimized for training and 8I for inference. We had touched on Ironwood v7 also being optimized for inference, yet this marks the first time the architecture has been split for two purposes. By splitting TPUs into two workloads, Google can optimize for AI agents, as it steepens the competition with Nvidia’s inference-specific variants (like the L40s and Rubin’s CPX).
According to Google, the 8t TPU offers 2.7X performance per dollar over Ironwood and 2x performance per watt, with up to 9600 chips per pod, and pod-level FP4 performance of 121 exaFLOPs. Nvidia’s GB300s still lead on compute, yet the scale up of 9600 chips is where Google will stand out on “per pod” benchmarks, especially when you factor in the lower costs of TPUs. The new Virgo network fabric links up to 134,000 8t chips, which can help Google assert lock-in with its networking stack.
However, the 8i chip is the bigger announcement as it scales to 1,152 chips per pod, or 4.5X Ironwood’s previous 256-TPU pod for inference deployments. The HBM capacity is 7X with 331.8 TB of capacity compared to 49.2 TB in the previous generation. Because inference workloads are memory-bound rather than compute-bound, the bottleneck will be loading expert weights and the KV cache as opposed to FLOPs. The 331TB of HBM holds and serves large massive models with long context windows.
The result of 8i is a lower serving-cost per token. Last quarter, Google’s CEO stated there was a 78% reduction in Gemini serving unit costs in 2025, which in turn, helps Google to be aggressive on API pricing (yet still see margin expansion) compared to other hyperscalers.
The flywheel of how Google can drive down costs, attract more customers, while keeping margins strong is what is important. It’s the combination of 2.7x performance per dollar and the 9,600-chip pods and 1,152 chip pods that make this month’s announcement an important step for custom silicon.
When you continue to connect the dots, it’s not surprising to see Google announced this quarter it’s moving into merchant sales for its TPUs.
“As TPU demand grows from AI labs, capital markets firms and high-performance computing applications, we'll begin to deliver TPUs to a select group of customers in their own data centers in the hardware configuration to expand our addressable market opportunity.”
Financials:
By Royston Roche
Revenue Accelerates to 21.8% YoY, Google Cloud Surges 63%
Google’s Q1 2026 revenue came in at $109.9 billion, beating estimates by 2.7% and accelerating to 21.8% YoY and 19% in constant currency, up from 18% YoY and 17% in CC in Q4 2025. This marks a meaningful re-acceleration in the top line, with growth now at its fastest pace in several quarters. On a sequential basis, revenue declined (3.5%) QoQ, which is typical given Q4's seasonally elevated advertising spend. The same seasonal pattern was observed in Q1 2025 with a (6.5%) QoQ decline.
Looking ahead, analysts expect Q2 revenue to grow 18% YoY to $113.78 billion and 17.2% YoY to $119.93 billion in Q3 2026. For the full year 2026 revenue is expected to grow 17.6% YoY to $473.54 billion and 15% YoY to $544.57 billion in 2027.
Google Cloud Leads Growth
Google Cloud was the standout performer in Q1 2026, generating $20.0 billion in revenue, up 63% YoY and 13% QoQ — an extraordinary acceleration from 48% YoY in Q4 2025 and 34% in Q3 2025. Cloud operating income grew by 202.8% YoY to $6.6 billion for an operating margin of 32.9%, expanding sharply from 30.1% in Q4 2025 and 17.8% in Q1 2025.
Cloud revenue growth was driven by strong performance in Google Cloud Platform (GCP), which continued to grow at a rate that was much higher than cloud's overall revenue growth rate. The largest contributor to cloud growth this quarter was AI solutions, driven by strong demand for industry-leading models, including Gemini 3.
In addition, the company had strong growth in AI infrastructure due to continued deployment of TPUs and GPUs and core GCP continues to be a sizable contributor driven by demand for infrastructure and other services such as cybersecurity and data analytics. Workspace again delivered strong double-digit revenue growth, driven by an increase in the number of seats and the average revenue per seat.
Google Cloud's backlog reached $462 billion, up 400% YoY and 90.3% QoQ from $242.8 billion at year-end 2025 — a striking indicator of accelerating enterprise demand.
Google Search & other advertising revenue was $60.4 billion, up 19% YoY but down (4%) QoQ on typical seasonality. YouTube Ads revenue was $9.88 billion, up 11% YoY and down (13%) QoQ, consistent with prior year Q1 seasonality (YouTube was down (15%) QoQ in Q1 2025). Google Advertising revenue was $77.25 billion, up 16% YoY and down (6%) QoQ. Overall Google Services revenue was $89.64 billion, up 16% YoY and down (6%) QoQ.
Margins Expand Significantly Across the Board
Google delivered substantial margin expansion in Q1 2026, with gross, operating, and net margins all improving meaningfully on a sequential and YoY basis. GAAP gross margin reached 62.4% in Q1 2026, up 2.7 points YoY from 59.7% in Q1 2025 and up from 59.8% in Q4 2025, generating gross profit of $68.63 billion.
GAAP operating margin expanded to 36.1% in Q1 2026, up from 33.9% in Q1 2025 and 31.6% in Q4 2025, demonstrating meaningful operating leverage. Operating income was $39.7 billion, versus $30.6 billion in Q1 2025, up 29.7% YoY.
GAAP net margin surged to 56.9% in Q1 2026, a substantial increase from 38.3% in Q1 2025. Net income was $62.6 billion, up sharply from $34.5 billion in Q1 2025. The increase was primarily due to unrealized gains in the nonmarketable equity securities of $28.7 billion in Q1 2026 compared to $7.7 billion in the same period last year.
GAAP EPS
The company’s Q1 GAAP EPS grew by 81.9% YoY to $5.11 and excluding one-time gains it grew by 26% YoY to $2.76, beating estimates by 3.4% primarily driven by strong operating leverage.
Looking ahead, analysts expect EPS to grow by 20% YoY to $2.77 in Q2 and 1.1% YoY to $2.90 in Q3. Full year 2026 EPS is expected to grow by 7.7% YoY to $11.64 and 15.4% YoY to $13.43 in 2027.
Cash Flow and Balance Sheet
The company’s operating cash flows grew on a YoY basis driven by higher profits in Q1. However, free cash flows were down due to higher capex to support future growth.
- Q1 operating cash flows grew by 26.7% YoY to $45.8 billion with an operating cash flow margin of 41.7% compared to 40.1% in the same period last year.
- Q1 free cash flows were down (46.6%) YoY to $10.1 billion with a free cash flow margin of 9.2% compared to 21% in the same period last year. The compression in FCF is directly attributable to a massive increase in capital expenditure — capex surged to $35.67 billion in Q1 2026, up 107.4% YoY and 28.1% QoQ. This aggressive capex ramp is the primary risk to near-term FCF generation, though it reflects the company’s significant investments in AI infrastructure and Google Cloud capacity.
- Management also increased the 2026 capex guidance to $185 billion at the midpoint from the previous $180 billion to include the investment related to the acquisition of Intersect, which closed in March.
- On the balance sheet, cash and marketable securities totaled $126.84 billion, while total debt increased to $77.5 billion from $46.55 billion at the end of Q4 2025 due to the issuance of new debt of $31 billion in Q1 2026.
Conclusion:
The market has feared merchant ASICs for ten years, and finally, Google is going for the grand prize. With the v8 generation, Anthropic's 5GW commitment, and the announcement of selling TPU systems to third parties, the narrative around custom silicon versus GPUs will be forever changed (not hyperbole).
Cloud acceleration to 63% with margins doubling is a good start, given it’s the biggest acceleration we’ve seen from a hyperscaler since the AI trade began. The backlog indicates Google Cloud will continue to grow at a healthy run rate. However, capex is growing faster and the market may take note of this depending on macro conditions.
The AI market is evolving daily. We are only one week into earnings and the progress being reported is monumental on a company basis (Bloom, GEV, Google). We’ve got a ton of earnings coverage on the way over the next two weeks. Keep an eye on your inbox.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in GOOGL at the time of writing and may own stocks pictured in the charts.
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