Alphabet Earnings: AI Propels Business Across Segments, Cloud Is Brightest

Key Morningstar Metrics for Alphabet

• Fair Value Estimate
  : USD 433
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Alphabet’s Earnings

Alphabet GOOG began 2026 with a very strong set of financial results. The firm’s sales grew 22% to USD 110 billion, with Google Cloud up 63% to USD 20 billion. The firm’s operating margins expanded 220 basis points, with services and cloud operating margins both expanding year over year.

Why it matters: A year ago, Alphabet was trading as if it had lost the artificial intelligence race. What a difference a year, and clear evidence that the firm is generating strong returns from AI, can make.

• The clearest way to see these is in Google Cloud, where sales accelerated sequentially and annually. We estimate the firm’s Gemini API sales are now generating around USD 15 billion in annual revenue, up from a USD 9 billion run rate last quarter.
• The firm’s core search business also continues to benefit from AI. We view AI overviews and AI mode as sound moves to stem customer churn to AI-enabled alternatives, while maintaining user engagement and driving search sales growth of 19% in the quarter.

The bottom line: We increase our fair value estimate for wide-moat Alphabet to USD 433 from USD 340. The valuation rise is driven by increased confidence in the firm’s ability to successfully monetize its custom silicon, or TPUs, as well as drive large-scale, profitable usage of its LLM, Gemini.

• We don’t believe we will reach a supply-and-demand equilibrium for AI compute any time soon. This imbalance means that any incremental compute that comes online, via TPUs or Gemini API, meets a buyer willing to pay a pretty penny to acquire it.
• This pricing dynamic showed up in Google Cloud margins, with cloud margins growing 15 points year over year to 33%. Finally, we believe this supply dynamic will further boost TPU sales, as AI labs and other large compute customers seek to gain access to leading-edge compute.

Coming up: We expect Alphabet to release its new LLM, Gemini 3.5, at the Google I/O in May. We are expecting it to be on par with other frontier models from Anthropic and OpenAI.