Alphabet earnings: cloud shines, spending steals the show

Management’s message is clear: compute is the constraint, not ideas. Alphabet says spending supports frontier model work, better user experiences, advertiser return on investment (ROI), and cloud demand. The company also highlights real-world bottlenecks, such as power and supply chains.

This is where the story gets interesting for long-term investors. Big capex is not automatically good or bad. It is a timing choice.

In the near-term, capex tends to pressure free cash flow, which is the cash left after running the business and investing in it. When the investment curve rises faster than revenue, the cash curve can wobble.

Over time, capex can widen a moat if it builds scale that smaller rivals cannot match. In cloud and AI, scale often means better performance, lower unit costs, and faster product cycles.

The market is not rejecting the strategy. It is asking for receipts. In this context, “receipts” means visible monetisation. Higher cloud profits help. So does steady Search growth. But the bar rises because the cheque is bigger.

A useful way to frame this is to stop thinking of capex as “spending” and start thinking of it as “capacity”. Alphabet is buying servers, data centres, and the electrical and networking kit that makes AI work at scale. If demand stays hot, this is smart positioning. If demand cools, the depreciation bill still arrives on time.

Two extra engines: Waymo and the Apple partnership

Even if Search had stumbled, Alphabet now has two underappreciated sources of optional upside.

First, Waymo. Alphabet’s autonomous driving unit is valued at 126 billion USD in its latest financing round. That is a striking number for something that sits inside “Other Bets” and often gets treated like a science project. The share price reaction to the valuation news is muted, which suggests the market may not fully credit the asset, or may be waiting for clearer economics. Either way, it is a reminder that Alphabet is not only a search-and-adverts company.

Second, the Apple partnership. Apple and Google say they have entered a multi-year collaboration where the next generation of Apple foundation models will be based on Google’s Gemini models and cloud technology. The aim is to power future Apple Intelligence features, including a more personalised Siri.

Scale is the point here. Apple now reports more than 2.5 billion active devices in its installed base. If Gemini becomes part of that ecosystem, Alphabet gets a rare test environment: massive usage, demanding consumers, and high expectations on privacy and reliability. That kind of stress-test can help Gemini improve quickly, and it can also make it feel more “default” to businesses that want an AI assistant that works and keeps working.

Risks

The first risk is timing. Capex pulls cash forward, while returns can arrive later. If cloud margins stop improving, or if revenue growth does not keep pace, investors may stay sceptical for longer.

The second risk is Search disruption. AI Overviews do not hurt this quarter, but user behaviour can shift quickly. Watch for any sign that advertisers see lower conversion quality or weaker pricing.

The third risk is regulation. Alphabet remains in the crosshairs on competition and platform power. Legal outcomes are hard to forecast, but they can change business models at the margin, which matters when you are spending at scale.

Investor playbook

• Track Google Cloud operating margin each quarter as a clean “receipt” for AI-driven demand.

• Watch capex versus free cash flow trends: stabilisation matters more than one big quarter.

• Monitor Search revenue growth as AI Overviews roll out further, weakness there changes the whole debate.

• Follow Waymo milestones and Apple Intelligence rollout pace as signals of optional upside becoming real business.

The quarter delivers, the capex sets the test

Alphabet’s quarter answers the first question investors had: is the core business still healthy while AI reshapes the product? For now, yes. Search holds up, Google Services beats expectations, and cloud profitability improves in a way that looks like real operating leverage.

Then Alphabet raises the second, bigger question: what happens when you double the size of the cheque? The 2026 capex plan makes the company’s ambition unmistakable, but it also turns patience into a priced-in assumption. The story is no longer “can Alphabet build great AI?” It is “can Alphabet turn that AI into cash before the bill feels too heavy?”

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