Executing Well, But the Market Knows It

Alphabet is the parent company of Google and one of the world's largest companies by market capitalisation ($3.4 trillion as at March 2026). The business generates the vast majority of its revenue — roughly 90% — from Google Services, which includes Google Search advertising, YouTube advertising, the Google Play app store, and hardware products like Pixel phones and Chromebooks.

Google Cloud is the fast-growing second pillar, providing cloud computing, data analytics, and AI infrastructure services to businesses. Fourth-quarter Cloud revenue was up 48% to $17.7 billion, putting the annual run rate above $70 billion.

The third segment, Other Bets, houses earlier-stage investments including Waymo (self-driving cars), Verily (healthcare technology), and Google Fiber (internet access). These are loss-making but represent potential future growth options.

What gives Alphabet a structural advantage is its extraordinary data position: Android powers the majority of the world's smartphones, Google Search indexes the world's information, Gmail and YouTube serve billions of users, and all of these products are now receiving Gemini AI integration.

• Earnings per share growth: Diluted earnings per share grew 34% in FY 2025, from $8.04 to $10.81. Over the past five years, earnings per share has grown at an average annual rate of approximately 30%. This is exceptional for a company of Alphabet's size.
• Capital expenditure: This is the big story. Capital expenditure was $91.4 billion in FY 2025, up 74% from $52.5 billion in FY 2024. Guidance for FY 2026 is $175–185 billion — a near-doubling. This is being spent on AI infrastructure (data centres, custom chips, networking).
• Revenue growth: Revenue grew 15% to $402.8 billion. Passenger revenue rose 2.5%, while "other" revenue (including Cloud and subscriptions) grew 16%.
• Operating margin: The operating margin dipped slightly from 32.0% to 31.6% (down 40 basis points). Separately, the gross margin improved from 58.2% to 59.7%. The risk is that the scale of AI infrastructure investment will compress margins further as depreciation charges flow through.
• Depreciation headwinds: Depreciation was already up 38% in FY 2025 to $21.1 billion. Management has flagged that this will "meaningfully increase" in FY 2026. This is an inevitable consequence of the capital expenditure programme and will weigh on reported profits.
• Share buybacks: Alphabet has reduced its share count by approximately 10% over the past five years through buybacks, directly boosting earnings per share.
• Google Cloud momentum: Fourth-quarter Cloud revenue of $17.7 billion was up 48% year-on-year. The annual run rate now exceeds $70 billion. This is becoming a materially important profit driver.

Five-year overview

Key financials

The headline issue is this: earnings growth is outperforming revenue growth. Earnings per share grew 34% while revenue grew only 15%. For companies like Alphabet (and Amazon, Apple), this raises the question: how can they continue this into the future? Perhaps it's different earning streams. We can also see that the gross margin improved from 58.2% to 59.7% last year. But the scale of AI infrastructure investment will inevitably create depreciation headwinds.

Capital expenditure trajectory

The capital expenditure on this company is massive. The FY 2026 guidance of $175–185 billion represents nearly a doubling from the already elevated FY 2025 spend — and the FY 2025 spend was itself up 74% on FY 2024.

But they can afford it. Post-tax profit was $132 billion. The company generates sufficient cash to fund even this extraordinary level of investment, though free cash flow will be under pressure.

I expect the growth rate to be 25% going forward. Why?

• AI integration into advertising: Likely to improve advertising effectiveness and return on investment for clients over the coming years.
• Google Cloud momentum: Fourth-quarter Cloud revenue up 48% to $17.7 billion; annual run rate now exceeds $70 billion.
• Enterprise AI adoption: General pick-up in usability of integrated Google tools into businesses.
• Data advantage: Alphabet has a massive advantage over other AI companies through Android mobile systems (rich database of user behaviour), Google Search indexing (the world's information), heavy usage of Google data systems and servers, and Gmail, YouTube, and other products now getting Gemini integration.
• Gemini positioning: Currently one of the four front-running AI systems. The Gemini App has reached 750 million monthly active users.

Valuation drivers

I'm using 25% growth. Actual profitability growth was 34% in FY 2025, but the scale of capital expenditure and coming depreciation headwinds make it prudent to use a lower forward number. The 25% growth rate could arguably be higher given the Cloud trajectory and AI monetisation potential — but could equally be lower if depreciation compresses margins more than expected.

The share price has been on a general downward slope since the end of January — nearly a month of decline at the time of writing. This very much ties in with general sentiment and concerns about spending on AI-based products.

The market is wrestling with a paradox: every major metric beat expectations, yet investors are nervous about the sheer scale of capital expenditure.

• Capital expenditure intensity: The FY 2026 guidance of $175–185 billion is staggering. If the return on this investment fails to materialise within a reasonable timeframe, it will weigh heavily on returns and sentiment.
• Depreciation headwinds: Depreciation was up 38% in FY 2025 to $21.1 billion and management has flagged it will "meaningfully increase" in FY 2026. This will compress reported margins even if the underlying business continues to perform well.
• Earnings growth outpacing revenue growth: Earnings per share grew 34% on 15% revenue growth. This gap cannot persist indefinitely — at some point, earnings growth must converge with revenue growth unless margins expand further, which seems unlikely given the capital expenditure trajectory.
• AI competitive dynamics: Alphabet is one of four front-running AI systems, but the competitive landscape is uncertain. Disruption from a competitor (or a shift in the underlying technology) could undermine the return on Alphabet's massive AI investment.
• Net borrowing has increased: Net borrowing has gone from $0 to approximately $28 billion over five years. While easily manageable for a company earning $132 billion, the direction of travel is worth monitoring.
• Regulatory and antitrust risk: Alphabet faces ongoing antitrust scrutiny around its Search dominance. An adverse ruling could force structural changes to the business.

• Capital expenditure guidance cut: If management signalled a reduction in planned capital expenditure, free cash flow expectations would improve significantly and the valuation would look more attractive.
• Cloud revenue growth decelerating below 30%: A sustained slowdown in Cloud growth would undermine the AI monetisation thesis.
• Margin compression beyond expectations: If the operating margin fell below 28%, it would suggest the depreciation burden is overwhelming the revenue growth.
• Share price pullback to below $250: At lower prices, the value opportunity would widen meaningfully, potentially creating a buy signal.
• A clear monetisation proof point for AI: If Alphabet demonstrated concrete evidence that AI integration was driving measurably higher advertising revenue per user, it would support a higher growth rate assumption.