Alphabet Revenue Tops Expectations on Record Quarter for Cloud Unit

Alphabet (GOOG) topped Wall Street estimates for quarterly revenue on Wednesday, as enterprise spending on artificial intelligence delivered the best quarter of reported growth for its cloud unit yet. Shares of the company were up more than 6% in extended trading.

The Google parent company's total revenue rose 22% to $109.9 billion in the first quarter, above estimates of $107.2 billion, according to LSEG data.

Cloud Growth Accelerates Sharply

Revenue at Google Cloud grew 63% to $20 billion in the first quarter ended March, well above analysts' average estimate of a 50.1% increase. According to the chart showing Google Cloud's quarterly growth rates, the segment has been on a steep upward trajectory:

The 64% growth rate in Q1 2026 represents the best since the company began breaking out the segment's revenue in 2020, according to LSEG. The sharp acceleration, fuelled by demand for generative AI tools, appears to vindicate Alphabet's push to turn its vast research capabilities into commercial gains.

"Our enterprise AI solutions have become our primary growth driver for cloud for the first time," CEO Sundar Pichai said on a conference call with analysts, noting that sales on those products grew eightfold from a year ago.

TPU Sales to Customers

Google also began selling its TPU chips, which compete with Nvidia's (NVDA’s) GPUs, directly to some customers, Pichai announced. For years, Google reserved its TPUs — "tensor processing units" — only for internal use to develop technologies such as its Gemini AI model. Its decision to lease TPUs to cloud customers helped drive growth for Google Cloud, but the company had held off on directly selling those chips until now.

Alphabet expects to begin recognising a small percentage of revenue from TPU sales agreements by the end of the year, with the vast majority converting in 2027, CFO Anat Ashkenazi said. In directly selling TPUs, Google saw a chance to expand its addressable market, even as it continues to face constraints on computing power.

Constrained capacity prevented even higher cloud revenue growth and contributed to the cloud unit's backlog nearly doubling quarter-on-quarter to $460 billion, Pichai said. Ashkenazi added that the company expected to recognise just over 50% of that backlog over the next 24 months.

Capex Hike

To address capacity constraints, Alphabet signalled plans to continue aggressively increasing capital expenditures. Ashkenazi raised this year's forecast to between $180 billion and $190 billion — a $5 billion increase from last quarter — and said Alphabet was planning another significant increase in 2027.

Capital spending in the first quarter more than doubled from a year earlier to $35.67 billion. Overall, Alphabet spent $91.45 billion on capex in 2025.

"Perhaps even more importantly than Alphabet's massive cloud growth pace is the broader justification that the $180 billion capex plan — that surprised the market last quarter — is well within the company's spending power, considering the durability and quality of the revenue curve shown today," said Thomas Monteiro, senior analyst at Investing.com.

Profitability and Net Income

Operating income for the cloud unit tripled to $6.6 billion in the first quarter from $2.2 billion a year earlier. Alphabet's overall consolidated operating income increased 30% to $39.7 billion.

Net income grew even more sharply to $62.6 billion, an 81% increase, though the figure was heavily boosted by a $36.9 billion gain on equity securities. Alphabet holds stakes worth billions of dollars in SpaceX and Anthropic, both of which are aiming for banner IPOs this year.

Comparison with Cloud Rivals

Investors were more bullish on Alphabet than its two cloud rivals, both of which experienced stock price drops after also reporting quarterly earnings on Wednesday.

Revenue at Amazon Web Services jumped 28% to $37.6 billion in the first quarter, compared with analysts' average estimate of a 25.1% increase. Azure and Microsoft's other cloud services revenue grew 40%, in line with consensus estimates.

Google Cloud's quarter showed "it can significantly contribute to the wider Alphabet portfolio after years of big operating losses," Forrester principal analyst Lee Sustar said.

Full-Stack Approach

As its enterprise business boomed, Alphabet's Gemini chatbot drove its "strongest quarter ever" for consumer AI, Pichai said. He said the company was enjoying growth across the board thanks to its "full-stack" AI approach — referring to every layer of the AI technology chain, including chips, data centres, AI models, and developer tools.

The company said it had 350 million paid subscriptions across YouTube, its cloud storage, advanced AI service Google One, and other products.

Market Sentiment: 

The sentiment is strongly positive, reflecting a decisive inflection point for Google Cloud and validating Alphabet's AI investment strategy. The 64% cloud growth rate — the best since the segment was reported — demonstrates that enterprise AI spending is translating directly into revenue at an accelerating pace. The $460 billion backlog, nearly doubling quarter-on-quarter, provides exceptional forward visibility and justifies the aggressive capex ramp to $180 - 190 billion this year. The decision to sell TPUs directly to customers expands Alphabet's addressable market and positions it as a competitor to Nvidia in AI chips. Operationally, cloud operating income tripled to $6.6 billion, showing that growth is profitable. The 6% after-hours stock gain reflects investor relief that the capex spending is yielding tangible returns, contrasting with concerns about Microsoft's AI monetisation challenges. For context, AWS grew 28% and Azure 40% — both solid, but Google Cloud's 64% stands out as a share-gaining performance. The net income figure ($62.6 billion) was boosted by equity gains, but the underlying operating performance is strong. Alphabet has successfully pivoted from being perceived as an AI research lab to a commercial AI powerhouse. The key risks remain capacity constraints (which are limiting even higher growth) and the massive capex commitment, but the revenue trajectory and backlog provide confidence that spending is well within Alphabet's capacity. This quarter likely marks a turning point in how investors value Google Cloud as a core growth driver rather than a cost centre.

Disclaimer:
This content has been generated using AI technology and is intended for informational purposes only. While efforts have been made to ensure accuracy and relevance, this text should not be considered professional advice or an official statement. Always verify information from authoritative sources before making any decisions. This is not financial advice.