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Alphabet released its 1Q 2026 results, and the structural transformation of the business is underway. Revenue grew 21.8% year-on-year to roughly USD110bn, but the key fact is the staggering acceleration of Google Cloud. The segment surged over 63% this quarter, and looking at the trajectory over the last two years, Cloud has moved from representing 12% of total revenue to over 18% today. What is even more impressive from an operational standpoint is the margin expansion within this division; Cloud operating margins hit a record 32.9%, a massive jump from the 9.4% margin reported only two years ago. Meanwhile, Google Services continues to perform as a highly efficient business, growing by 16% with a 45.3% operating margin.
To pursue the leadership in the AI framework, there is an unprecedented capital commitment that is reshaping the company’s cash flow profile. Capex intensity has doubled over the last 24 months, peaking this quarter at 32.5% of revenue. This infrastructure spending is now absorbing nearly all of the company's operating cash flow (management interrupted tactical share buy-backs to prioritize funding for the fixed assets' expansion). As a result, SBC-adjusted Free Cash Flow contracted significantly to USD3.4bn , and the cash conversion rate dropped to 10%.
On the strategic front, management pointed to many signs indicating growing scale of AI adoption within Alphabet ecosystem. Management strongly relies on the "vertically optimized" approach, co-developing everything from custom TPUs to the Gemini models themselves.
Due to this great execution, the company is currently trading at 40x LTM NOPAT, a multiple that has effectively doubled since last year, highlighting a massive comeback in popularity among market participants.
My summary findings and thoughts:
* From a business standpoint, looking at the performance of the last few quarters, Cloud has been representing the powerful engine of revenue and profitability development and experienced an outstanding demand during the last quarter fostering the acceleration of the business. Google Services confirmed its solid double-digit expansion.
* The operating margins expanded materially and permitted a consistent generation of operating cash flow. Capex are definitively absorbing nearly all the operating cash flow.
* The strategy outlined by the management is ambitious and requires an extraordinary capital deployment. For the time being, AI seems to represent a factor accelerating the business as a whole and creating new possibilities in a context where the strength, coming from the leadership position, is perceived.