As we had discussed in our free newsletter in late January, The $530 Billion AI Question: Which Big Tech Stock is Winning?, the key question is no longer which Big Tech stock is spending the most on AI, but rather who is translating this capex into measurable revenue and sustainable margins. To spoil the conclusion of that analysis, our takeaway was that Alphabet was the best positioned “given its ability to monetize AI directly through Search while simultaneously accelerating Cloud growth. To add to this, Google will see improved unit economics with custom silicon with a path to expand margins despite elevated capex.”
The company’s Q4 results proved that point, with Cloud growth seeing the largest acceleration against AWS and Azure at 14 points to 48%, substantial inference serving cost reductions within TPUs and strong Cloud margin expansion, as well as accelerating Search growth. And despite a significant capex raise for 2026, coming in more than 50% of estimates and nearly doubling YoY, management emphasized the measured and careful approach they are taking to prevent overspending.
Cloud Sees Substantial 14 Point Acceleration to 48% YoY
Of the Big Three, Alphabet reported the strongest AI-driven cloud acceleration this quarter, coupled with strong AI metrics and backlog growth that support this acceleration continuing through 2026.
Google Cloud growth accelerated each quarter this year, though Q4 recorded the sharpest acceleration at 14 points to 48% YoY, with revenue coming in at $17.66 billion. Notably, this marked the segment surpassing a $70 billion annualized run rate, up from less than $50 billion annualized at the start of 2025. This would also mark its fastest revenue growth in more than four years. For Q1, Google expects strong growth to continue despite having tight accelerator supply.
While the sharp acceleration is certainly impressive, sequential growth figures show a strong underlying trend within Cloud – for three quarters in a row, Cloud has delivered >$1 billion in QoQ growth, with each quarter larger than the last and Q4 increasing more than $2.5 billion versus Q3. Putting this in perspective to highlight Google Cloud’s strong AI-driven momentum, this was nearly as large as a QoQ increase as AWS, which rose $2.57 billion sequentially despite being double the size of Google Cloud.
In percentage terms, Cloud growth accelerated from ~11% QoQ in Q2 and Q3 to 16.5% QoQ in Q4; this compares to 7.8% QoQ for AWS in Q4 and likely <2% QoQ for Azure.
Alphabet explained that the strong Q4 was fueled by GCP, which “continued to grow at a rate that was much higher than cloud's overall revenue growth rate” on “accelerating growth in enterprise AI products, which are generating billions in quarterly revenues.” Management added that this was driven by TPU and GPU deployment along with high demand for models such as Gemini 3, with Gemini 3 Pro already processing 3X as many daily tokens as 2.5 Pro.
Google Cloud Reporting Broad AI Demand
Alphabet also provided a handful of stats accentuating AI’s impacts to growth. Revenue from products built on Google’s own genAI models increased nearly 400% YoY. Revenue from third-parties building AI applications rose 300% YoY. In total, Google Cloud has 14 product lines spanning infrastructure, platform and high-margin AI products and services exceeding $1 billion in annual revenue.
It’s important to note that growth is currently off of a small base, thus the market will likely look toward overall AI revenue to justify the capex increase Alphabet is guiding for. While there were no specific updates to Cloud’s AI revenue or contribution, assuming that AI contributed roughly half of the quarter’s 48% YoY growth, this would place AI’s run rate at more than $11 billion.
Strong Cloud Growth Estimates in 2026/27, Supported by Rapid Backlog Growth
For 2025, Google Cloud revenue increased 35.8% YoY to $58.7 billion, though analysts are currently projecting the segment to build on Q4’s momentum to a significant acceleration in 2026 with strong growth persisting in 2027.
For example, Morgan Stanley projects Google Cloud revenue to increase 61% YoY in 2026, led by GCP growth of 71% on strong AI demand. This would roughly project revenue to reach $94.5 billion by the end of this year. For 2027, Google Cloud growth is projected to moderate to 46% YoY, led by GCP once again at 51%; running off the above estimate, this would place Google Cloud revenue at approximately $138 billion.
Supporting this potential growth curve for Cloud is Alphabet’s robust backlog growth and its deal with Anthropic ramping to >1GW of capacity in 2026, said to be worth tens of billions. Alphabet reported $242.8 billion in backlog in Q4, up 161% YoY and 54% QoQ, with Google Cloud’s backlog stated to be $240 billion, up 55% QoQ and driven by cloud products and enterprise AI.
This marked a nearly 80 point acceleration from 82% YoY growth in Q3, while QoQ growth accelerated another 8 points off an already rapid 46% print – the inflection in backlog is quite clearly visible after surpassing $100 billion in Q2.
Cloud Seeing Strong Margin Expansion, Substantial Inference Cost Reductions
Perhaps the most important piece for Cloud is Google’s ability to drive substantial reductions in inference serving costs while simultaneously driving strong revenue acceleration. This is visible in the strong operating margin expansion Cloud is witnessing.
Management explained that throughout 2025, Alphabet was able to lower Gemini’s inference serving costs by 78% through model optimizations, utilization and efficiency improvements. The rollout of its newest TPU, Ironwood, is likely to help with further cost reductions moving through 2026.
This is increasingly critical as Gemini usage continues to scale rapidly, with strong adoption both across consumers and enterprises. Gemini MAUs increased 100 million QoQ to 750 million, with management saying “all the metrics, be it active usage, the intensity of usage, retention all showed distinct progress across iOS, web, Android, et cetera, and geographically globally.” Paid Gemini Enterprise seats totaled 8 million in Q4, with Gemini Enterprise managing over 5 billion customer interactions, up 65% YoY, as enterprises continue to deeply integrate Gemini in critical workflows.
Overall, Alphabet’s first-party models are processing more than 10 billion tokens per minute on direct APIs, up more than 40% QoQ from 7 billion in Q3 (if you want to visualize this, this would be more than 5 quadrillion tokens annualized).
This strong adoption and 78% reduction in inference serving costs are increasingly visible in Cloud’s operating margin, which expanded each quarter for a total expansion of more than 12 points throughout 2025. In particular, Q4 saw the strongest expansion, with operating margin expanding 6.4 points QoQ alongside that 14 point revenue acceleration.
For the full year, Cloud delivered an operating margin of 22.5%, expanding 8.4 points YoY. This is quite a bit below AWS’ operating margin of 35.4% for 2025 and Microsoft’s Intelligent Cloud operating margin of 41.9% over the last twelve months, largely driven by Azure; however, Q4’s results show that Cloud is quickly catching up on the margin front, a trend that could be accentuated by accelerating revenue growth and lower inference serving costs.
Search Growth Accelerates to 17%
Outside of Cloud, Alphabet has a second AI monetization lever in Search, which continued to see growth accelerate in Q4 alongside strong adoption metrics.
Q4 saw Search revenue increase 16.7% YoY to $63.1 billion, marking a 2.2 point acceleration from 14.5% growth in Q3. Since the start of the year, Search growth has accelerated 6.9 points, an impressive feat considering it is now a $225 billion business. What’s also notable here is that this is the fastest growth Search has logged since Q1 2022, when revenue was roughly 37% lower at $39.6 billion.
On Search growth, management said that there was not a single driver responsible for the acceleration, as nearly all verticals accelerated in Q4, though commentary around AI suggests that it is playing an increasingly larger role in Search’s acceleration:
“We see AI Overviews and AI Mode continue to drive greater search usage and growth in overall queries, including important in commercial queries. Gemini-based improvements in search ads help us better match queries and craft creatives for advertisers. I talked about the understanding of intent and how this has significantly expanded our ability to deliver ads on longer and more complex searches that were, frankly, previously difficult to monetize. AI Max, for example, is already used by hundreds of thousands of advertisers and continues to unlock billions of net new queries in that sense. We see strength with SMB advertisers expanding their budgets and adopting automation tools, leading to better ROI. On the creative side, we're using Gemini to generate millions of creative assets via text customization in AI Max and PMax and so on.”
This quote and the one below are perhaps (one of) the most critical from Q4’s call:
“People are obviously using search, experiencing AI Overviews and AI Mode as part of it and Gemini app as well. And the combination of all of that, I think, creates an expansionary moment. I think it's expanding the type of queries people do with Google overall. And so overall, some of it all is what we see as a growth opportunity, and we haven't seen any evidence of cannibalization there.”
There are a couple major takeaways from these two quotes, with the most important being that AI and its integration and search are not cannibalizing search volumes and ad load like the market had originally feared, but instead are doing the exact opposite – opening up new pathways to monetization, such as in longer complex queries, driving total query growth, and opening up new ad placement areas such as below AI responses.
Alphabet added that once people begin using the new AI search experiences, engagement increases, noting that daily AI Mode queries per use in the US had doubled since launch with AI Overviews also performing well. Management said that users are also engaging in longer, complex search sessions, with AI Mode queries being 3X longer than traditional search on average, with a “significant portion” leading to follow-up questions.
The other key takeaway is that AI is also improving the other half of the growth flywheel, advertiser ROI, with Gemini helping improve query matching, ad ranking and ad quality, helping drive better ROI for advertisers. This is likely a key factor behind SMB advertisers increasing budgets, and other larger ad customers seeing significant increases in conversions or revenue. For example, Alphabet noted that using AI Max, fashion house Aritzia was able to deliver an incremental 80% uplift in conversions on high-value customers, while L’Oreal used AI Max to help drive a 23% increase in revenue for DTC brands.
Similar to Cloud, Alphabet did not expand on AI’s exact contributions to Search. Assuming around a 10-11% baseline for Search growth ex-AI, this would place AI’s contribution around 6-7 points, or around 35-40% of the YoY growth. This would roughly estimate AI’s run rate in Search to be in the mid $3 billion range, or likely in the realm of $12.5-14.5 billion annualized.
Capex Guided to $175-185 Billion, Nearly Doubling YoY
Alphabet is currently taking the most aggressive capex stance out of the hyperscalers, outlining capex to be $175-$185 billion in 2026, up nearly 97% YoY and more than 50% ahead of estimates for $119.5 billion. This is well above Meta’s guided 73% increase and Amazon’s ~56% guided increase, though technically Amazon is still higher at $200 billion.
Management noted that roughly 60% of capex will go towards servers and the other 40% to long duration assets including data centers, networking and other equipment, maintaining the same split as in 2025. This would project server spending to be roughly $105 to $111 billion, up from around $55 billion in 2025, with half of ML compute expected to go towards Cloud, likely in an effort to drive this revenue acceleration further and gain more share against AWS and Azure. Despite the substantial step-up in capex, CEO Sundar Pichai said Alphabet has been “supply constrained even as we've been ramping up our capacity,” and that he expects “expect to go through the year in a supply-constrained way” as demand remains very strong.
CFO Anat Ashkenazi provided clarity on Alphabet’s capex stance, pushing back on overspending fears, detailing how the company’s capex follows a rigorous framework from balance sheet and cash flow evaluation to ensure maximum efficiency is extracted from each dollar put towards infrastructure.
At its core, Alphabet has the financial stability within the balance sheet, with more than $126 billion in cash and equivalents, and cash flows, with projected operating cash flow of $195.9 billion in 2026, to support this capex raise. However, the most important piece will be how this capex will then translate to growth in both Cloud and Search.
Financials
Revenue Growth Accelerates to Fastest Pace Since Q1 2022
Alphabet delivered Q4 revenue of $113.83 billion, up 18.2% YoY, accelerating from 16.2% YoY in Q3 and marking Alphabet’s fastest growth since Q1 2022, driven by the accelerations in both Search and Cloud as detailed above.
Outside of those two, YouTube revenue decelerated five points to 9% YoY to $11.38 billion, Subscriptions, Platforms & Devices revenue decelerated four points to 17% YoY to $13.58 billion, and Google Network revenue declined (2%) YoY to $7.83 billion. Management faced a question on why YouTube growth was low and its new Genie models could play into growth:
Mark Mahaney, Evercore
“Could you just comment a little bit on the YouTube ad revenue, that 9% year-over-year growth? It sounded like direct response was good. And it sounded like from Search that Retail came in relatively strong. So it's a little surprising that it didn't kind of come through in the YouTube ads revenue growth.”
Google SVP and CBO Philipp Schindler
“In Q4, YouTube ads was driven indeed by strong growth in direct response. On the brand side, as Anat shared, the largest factor negatively impacting the year-over-year growth rate was lapping the strong spend on U.S. elections. We also saw a slight impact in some other brand-related verticals. But taking a step back, I think it's important to think about YouTube ads and subs holistically because when a user shifts from being an ad-supported user to a YouTube Music and Premium customer, it has a slightly negative impact on YouTube ads revenues, but a positive impact on our business. And we had strong revenue growth in YouTube subscriptions this quarter, particularly in the YouTube Music and Premium category.”
Turning to Genie, Alphabet’s new model for AI world generation, management emphasized that they will continue to offer a wide range of AI tools to empower creators on YouTube and keep creators at the center of the experience, noting that they are already seeing adoption for Genie and other models.
For 2025, Alphabet crossed the $400 billion milestone with revenue of $402.84 billion, up 15.1% YoY. This was a slight 1.2 point acceleration from 13.9% growth in 2024, a difficult feat to achieve at this revenue scale. 2026 revenue is currently projected to be $469.1 billion, accelerating to 16.5% YoY.
Margins Mixed in Q4
Margins were mixed in Q4, with gross and net margin both expanding YoY while operating margin was marginally lower. This dynamic was also visible within 2025’s margins, though Cloud’s sharp margin expansion and current trajectory suggests it could deliver an operating margin tailwind in 2026.
Alphabet reported a gross margin of 59.8% in Q4, up 1.1 points YoY and 0.1 points QoQ. Operating margin was 31.6%, down 0.5 points YoY but up 1.1 points QoQ; Google Services (Search, YouTube, Subscriptions) saw a segment operating margin of 41.9%, up 2.9 points YoY and 3.4 points QoQ, while Cloud saw operating margin of 30.1%, up 12.6 points YoY and 6.4 points QoQ. Net margin was 30.3% in Q4, up 2.8 points YoY but down 3.8 points QoQ (as Google recorded a $10.7 billion gain on equity investments in Q3 that impacted the bottom line).
For 2025, gross margin was 59.7%, up 1.5 points YoY, while operating margin was 32%, down just 0.1 points YoY. Despite the operating margin contraction, net margin expanded 4.2 points to 32.8%.
EPS Growth Will Appear Soft in Q1, Q3 2026
Alphabet reported EPS of $2.82 in Q4, beating estimates by 6.8% and representing a slight deceleration from 35.4% growth to 31.1% growth.
Looking ahead, Alphabet’s EPS growth will appear soft in both Q1 and Q3 2026 as the company recorded $9.8 billion and $10.7 billion in gains related to equity securities in these respective quarters in 2025, attributable to its stakes in private companies including SpaceX and Anthropic; Alphabet quantified the per-share impacts at $0.62 and $0.68 in Q1 and Q3 2025.
As a result of these equity gain-impacted comps, Q1 2026 EPS growth is projected to be (7.4%) to $2.60, before rebounding to nearly 20% YoY in Q2 to $2.77. It should be noted that the soft EPS growth rates in Q1/Q3 does not reflect any underlying change in Alphabet’s business momentum, but rather just timing of private funding rounds that sharply increased the value of its respective stakes – for example, backing out the equity-gain impacts would project growth of ~19.2% and ~32% respectively in Q1 and Q3 2026.
The two tough comps will also make 2026’s EPS growth look much lower, with estimates currently pointing to just 6.7% YoY growth to $11.53, versus a 34.5% YoY increase to $10.81 in 2025; backing out the two large equity-gains in Q1 and Q3, growth would project to roughly 21.2%.
Cash Flows and Balance Sheet — Watch FY26 FCF
Alphabet’s cash flows remained rather resilient in 2025, with FCF margin declining marginally in the face of a 74% increase in capex. However, FCF must be tracked closely as the capex surge could easily bring FCF margin to the single-digits.
In Q4, Alphabet reported operating cash flow of $52.4 billion for a 46% margin, up from a 40.6% margin in the year ago quarter but down from a 47.2% margin in Q3. For the full year, Alphabet reported OCF of $164.7 billion for a 40.9% margin, up from 35.8% in 2024.
Q4 free cash flow was $24.55 billion for a 21.6% margin, contracting on both a YoY and QoQ basis, from 25.8% in the year ago quarter and 23.9% in Q3. For the year, free cash flow was $73.3 billion for an 18.2% margin, down from 20.8% in 2024.
Looking ahead to 2026, analysts currently project Alphabet to generate operating cash flow of $195.9 billion, though this would leave just $15.9 billion in FCF at the midpoint of capex guidance. Based on current revenue estimates for $469.1 billion, this would roughly project FCF margin to be 3.4%.
Alphabet’s balance sheet remains healthy with cash and marketable securities of $126.8 billion, while debt was $46.5 billion, up from $21.6 billion in Q3 as Alphabet issued more than $26.5 billion in debt in the quarter. Debt is likely to rise sharply again in Q1 as Alphabet’s recent bond sale reportedly took in over $30 billion.
Valuation
Alphabet’s valuation has pulled back from its late 2025 peaks, and while it remains elevated relative to its five-year averages, it can be argued that the company has deserved at least some of this multiple expansion from the sharp Cloud acceleration and Search acceleration it is driving at scale.
Alphabet is trading at 8x forward PS, below its November peaks above 9.7x, but well above its 6.2x average forward PS multiple over the past five years. On the bottom line, there is a similar trend, with Alphabet trading at 27x forward earnings, below its peaks at 31x but again elevated versus its five-year average of 20.8x
Conclusion
Alphabet is capitalizing on dual AI monetization tailwinds, with Q4 showing a sharp acceleration in Cloud revenue to 48%. Search continued to accelerate to 17% in Q4, with AI playing a core role in driving query growth, improving monetization and boosting ROI, suggesting AI could be driving a notable six to seven point (or 70%) uplift to growth from a 10-11% estimated baseline. Analysts project Cloud growth to accelerate sharply in 2026, with some penciling in north of 60% growth, with backlog growth accelerating to 161% YoY and AI usage stats in the triple-digit range supporting such a scenario; however, Alphabet does face some challenges to free cash flow from its sharp capex raise to support this growth.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
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 do not own shares in GOOG at the time of writing and may own stocks pictured in the charts.
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