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

Key Morningstar Metrics for Alphabet

• Fair Value Estimate
  : $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 $110 billion, with Google Cloud up 63% to $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 $15 billion in annual revenue, up from a $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 $433 from $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.