Alphabet just produced one of the most emphatic quarterly results in its history. Revenue hit $109.9bn, up 22% year on year. Earnings per share came in at $5.11 against a consensus forecast of $2.63. Google Cloud revenue surged 63% to $20bn. The stock jumped 7% in after-hours trading.
The numbers alone would have made headlines. But the real story is what sits behind them: a capital expenditure programme so large it has no precedent in corporate history, and a set of results that suggest the money is producing returns.
The capex trajectory
Alphabet spent $35.7bn on capital expenditure in Q1 alone, more than double the $17.2bn it laid out in the same period last year. The company raised its full-year 2026 capex guidance to between $180bn and $190bn, up from a previous range of $175bn to $185bn. CFO Anat Ashkenazi told analysts that 2027 spending would increase again, in her words to a level that would "significantly increase" from 2026.
To put this in context, Alphabet spent $32.3bn on capex across the whole of 2023. It is now spending more than that in a single quarter. The money is going into data centres, servers, custom chips and the physical infrastructure required to train and serve AI models at scale.
Where the returns are showing up
Google Cloud is the clearest proof point. Revenue of $20bn in the quarter represented 63% year-on-year growth, more than doubling the segment's growth rate. The cloud backlog, which represents contracted future revenue, reached $462bn, roughly double the figure from the previous quarter. Ashkenazi said the company expects just over half of that backlog to convert into revenue within 24 months.
CEO Sundar Pichai framed enterprise AI as the primary driver. Paid monthly active users of Gemini Enterprise grew 40% quarter on quarter. The company doubled the number of deals worth between $100m and $1bn on a year-on-year basis and signed multiple contracts above $1bn.
Search, still the cash engine, grew 19% to $60.4bn. Operating margin expanded to 36.1% from 33.9% a year earlier.
The free cash flow question
For all the strength in revenue and margins, the capex surge is compressing free cash flow. Alphabet generated $10.1bn in free cash flow in Q1, down 47% year on year, as capital spending consumed an increasing share of operating cash. Pivotal Research has projected full-year free cash flow could fall close to 90% from 2025 levels.
This is the tension investors are trying to resolve. Alphabet is producing record revenue and expanding margins while simultaneously consuming record amounts of cash on infrastructure. The company is not alone. Amazon, Meta and Microsoft are all pursuing similar strategies. Combined capex among the four hyperscalers is expected to exceed $700bn this year.
Investors are drawing distinctions
The market response to earnings season drew a sharp line between the companies. Alphabet's stock rallied 7%. Meta fell by the same amount, even after beating its own estimates, because investors saw less visibility on AI returns. JPMorgan downgraded Meta the following day. At least nine analysts raised their Alphabet price targets, with Susquehanna moving to $460, Canaccord to $450 and TD Cowen to $450.
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The distinction is straightforward. Alphabet can point to 63% cloud growth, a $462bn backlog and expanding margins. The capex is enormous, but the contracted demand backing it is visible.
Alphabet shares gained 34% in April, their strongest monthly performance since October 2004. At a trailing price-to-earnings ratio of 15, the stock still trades at a discount to several of its megacap peers. The argument that the spending is reckless is getting harder to sustain.
