Google Cloud Revenue Grew 63% Last Quarter. Here's Why That Number Matters More Than Alphabet's Ad Business Right Now.
Google Cloud Revenue Grew 63% Last Quarter. Here's Why That Number Matters More Than Alphabet's Ad Business Right Now..
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Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is a digital advertising juggernaut. That goes without saying. In the first quarter, it collected $77.3 billion in ad revenue, up 16% year over year and representing 70% of the company's total top line. This figure puts the business significantly ahead of its industry peer, Meta Platforms .
But Alphabet's Google Cloud division, which posted 63% year-over-year revenue growth in Q1, is the main attraction. That sales gain matters more than the company's advertising operations.
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Google Cloud is really hitting its stride. In addition to the robust revenue jump mentioned, this segment reported a monster 203% surge in operating income. Advertising growth metrics don't hold a candle to these figures.
The market is so focused on the overall cloud market these days. And in Alphabet's case, its shareholders are locked in on how Google Cloud performs. That's because hyperscalers are spending incredible amounts of money to build data centers to capture artificial intelligence (AI)-related demand.
Alphabet's capital expenditures (capex) will go from $91 billion in 2025 to a projected $185 billion (at the midpoint) in 2026. This money is mostly directed toward expanding the technical infrastructure to support Google Cloud.
Therefore, it's not outlandish to assume that how Alphabet's stock performs in the coming years is perhaps more tied to the cloud division than to advertising. This is now an extremely capital-intensive operation, having also raised ample external financing, evolving from the asset-light structure investors once loved. In fact, Alphabet didn't conduct any share buybacks last quarter, upending a key tenet of its capital allocation policy that had been in place for a decade.
When it was revealed that Meta was building a cloud segment to monetize its excess computing capacity, the social media stock immediately popped 9%. That's a clear sign of just how important it is to the investment community that these big AI spenders earn a satisfactory return on invested capital sooner rather than later.
Alphabet's $185 billion in forecasted 2026 capex equates to 81% of the company's earnings before interest, taxes, depreciation, and amortization that analysts predict for the year. The capital outlays present a significant risk going forward, one that shareholders haven't had to worry about in the past.
However, the potential upside is also massive. If AI enables Google Cloud customers to create new products and services, boost revenue, and cut costs in ways that weren't possible before, which is the trillion-dollar question facing the global economy right now, then the capex might prove to be justified.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy .
Google Cloud Revenue Grew 63% Last Quarter. Here's Why That Number Matters More Than Alphabet's Ad Business Right Now. was originally published by The Motley Fool
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