Why Alphabet Won the Big Tech Earnings War: Google Cloud Surge and the New ROI Standard in AI

The most standout performance in Google's quarterly report was concentrated in the cloud business segment. Cloud revenue grew 63% year-over-year to $20 billion, with an operating margin of 33%, far exceeding market expectations. Google Cloud's backlog reached $460 billion, nearly doubling from the previous quarter, primarily driven by AI demand and TPU sales.

During the earnings call, management announced an upward revision to full-year capital expenditure guidance, from the previous $175-$185 billion to $180-$190 billion, while also hinting at a significant increase in capital expenditure for 2027.

Google's upward revision of its already substantial capital expenditure expectations would typically trigger market concerns. Analysts pointed out that the reason the market is pleased to see Google further expand its spending scale is that its cloud business's staggering growth rate and growing backlog have proven the effectiveness of the capital investment. Jake Behan, Head of Capital Markets at Direxion, stated, "Alphabet's investment is paying off because it is backed by a $460 billion backlog."

In horizontal comparisons, Google's performance also outpaced that of its competitors. Amazon's AWS revenue grew 28% year-over-year, while Microsoft's Azure and other cloud services revenue grew 40% year-over-year. Although Google Cloud has a smaller base and a later start, its performance in recent quarters has outperformed its rivals.

According to Google CEO Sundar Pichai, the current growth rate has not yet reached its limit. He stated that capacity constraints have hindered further growth in cloud revenue, and if computing power demands could be met, cloud revenue would have been even higher.

Microsoft and Amazon's overall performance this quarter was in line with expectations, but that is precisely why their stock prices fell—the market demanded more surprises.

UBS analyst Stephen Ju noted that Amazon's strong performance in e-commerce and advertising, combined with optimistic second-quarter guidance, provided some support for the stock price. However, regarding the cloud business, AWS's 28% growth this quarter fell short of expectations; UBS had expected 32%, while the market consensus was above 30%. This was the primary factor weighing on Amazon's shares.

Despite missing expectations, AWS's 28% growth this quarter marks its fastest pace in 15 quarters. Considering that AWS holds the largest market share and the highest base among the "Big Three" cloud providers, this is already a fairly impressive performance.

Barclays analyst Raimo Lenschow believes Microsoft delivered a solid first quarter but lacked major surprises. According to earnings data, revenue from Azure and other cloud services grew 40% year-over-year, or 39% in constant currency, slightly exceeding the 38.2% growth rate expected by analysts.

Furthermore, a slowdown in Microsoft's capital expenditure growth this quarter also sparked concerns. CAPEX for the quarter was $31.9 billion, a 49% increase year-over-year. However, compared to the previous quarter's record CAPEX—which surged 66% to $37.5 billion—this quarter saw a sequential decline of nearly 15%.

At present, both the expansion and contraction of capital expenditure can trigger market anxiety. The former is easy to understand, as high CAPEX implies increased depreciation expenses in the coming years and puts pressure on corporate cash flow. A narrowing of capital expenditure can even trigger greater concern, as it may signal that the company is beginning to fall behind.

Among these four companies, Meta is the least favored by investors, primarily because it raised its full-year capital expenditure guidance to an estimated $125-$145 billion for 2026, exceeding the previous forecast of $115-$135 billion. This represents the largest capex plan in Meta's history; CFO Susan Li stated that the revision was mainly driven by rising hardware component costs and data center expansion.

However, the problem is that unlike the top three cloud service providers, Meta does not generate direct revenue from cloud offerings. Its AI investments are primarily focused on optimizing social media recommendation algorithms and Llama models, as well as the development of AI agents that CEO Mark Zuckerberg has frequently highlighted of late.

Regarding large models, Mandeep Singh of Bloomberg Intelligence pointed out that Meta's proprietary Muse Spark model still lags behind other leading labs in user engagement. As for AI agents, management was unable to provide a clear monetization timeline. When pressed by analysts on when AI investments would yield a healthy return, Zuckerberg stated that the current focus is on building leading models and products, failing to provide a direct answer.

Even in its core business, Meta's daily active users decreased by approximately 20 million quarter-over-quarter, marking the first sequential quarterly decline in the company's history.

This series of performance indicators explains why Meta suffered a massive market sell-off: its lavish spending lacks a clear path to monetization and has rightfully been penalized by the market.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.