Alphabet Q4 2025 Earnings Summary
Gemini 3 Ignites Search + Cloud Acceleration as Alphabet Leans Into a $175–$185B AI CapEx Cycle
Alphabet delivered a standout Q4, with reaccelerating Search growth and a major Cloud step-up that reinforced the company’s “AI is additive” narrative. Revenue rose 18% y/y to $113.8B, ahead of expectations, driven by Search (+17%) and a sharp Cloud acceleration (+48%), pushing Cloud to an annual run-rate above $70B.
The bigger headline was strategic: Gemini 3 is now embedded across Search, Workspace, and developer tooling, and Alphabet is clearly positioning itself as a full-stack AI platform (chips → models → products → monetization). To support demand, management guided FY26 CapEx to $175–$185B — a step-change higher than analysts expected — which became the central debate for investors.
Key Financial Highlights
Revenue: $113.8B (above consensus)
Search & Other: $63.1B (+17% y/y, above consensus)
YouTube Ads: $11.4B (+9% y/y, below consensus; tough comp vs. election year)
Google Cloud: $17.7B (+48% y/y, well above consensus)
Operating Income: $35.9B (slightly below consensus; impacted by Waymo-related SBC)
Operating Margin: 31.6% (below consensus)
Free Cash Flow: $24.6B (well above consensus)
Cloud Backlog: $240B (+55% q/q, more than doubled y/y)
FY26 CapEx Guide: $175–$185B (materially above Street)
Search: AI Is Expanding Usage, Not Cannibalizing It
Search was the clearest proof point that Alphabet’s AI strategy is working commercially. Management described Search as an “expansionary moment” — and the data they shared supports it:
AI Mode queries per user doubled since launch (U.S.).
AI Mode queries are ~3x longer and more conversational (follow-up questions rising).
Nearly 1 in 6 AI Mode queries are non-text (voice/images), supported by tools like Circle to Search (now on 580M+ Android devices).
On monetization, Alphabet is still early, but crucially: it’s already testing ads placement in AI Mode, including “direct offers” tailored to high-intent shoppers. The subtext: Alphabet believes it can keep (or even improve) ad ROI as the interface shifts from “10 blue links” to conversational + agentic results.
Google Cloud: The Quarter That Changes the Conversation
Cloud was the engine of upside, with revenue up 48% y/y and operating income more than doubling, pushing Cloud margin to ~30%. Management framed Cloud momentum as coming from three forces:
More new customers, faster (new-customer velocity doubled vs early 2025).
Bigger commitments (2025 saw more $1B+ deals than the prior 3 years combined).
Existing customers consuming ahead of plan (spend running 30%+ above commitments).
The most important “tell” was backlog to $240B, up 55% sequentially, signaling demand is outrunning supply — and helping justify the CapEx ramp. The narrative here is simple: Cloud is no longer just growing — it’s becoming a scale profit engine that can absorb massive infrastructure investment and still expand margins.
YouTube: Solid, but the One Soft Spot
YouTube ads grew 9%, but came in below expectations — management pointed to direct response strength but also noted the tough comp vs last year’s election-driven advertising.
The broader YouTube ecosystem remains strong: streaming leadership in the U.S., subscriptions momentum (Premium/Music), and Shorts monetization improving (including claims that in some markets Shorts earns more per hour than traditional in-stream). But near-term, YouTube didn’t drive the beat — Search + Cloud did.
AI Platform Strategy: Full Stack Is the Moat
Alphabet’s “AI full stack” pitch is getting sharper:
Infrastructure: NVIDIA GPUs + in-house TPUs; serving costs down 78% in 2025 via optimization.
Models + tooling: Gemini 3 Pro adoption surging; token processing growing fast.
Distribution: Gemini baked into Search, Workspace, Android, Chrome, and developer workflows (Antigravity).
Enterprise traction: 8M+ paid seats of Gemini Enterprise in ~4 months; 750M Gemini app MAUs.
The overarching message: Alphabet is trying to be the company that builds the models, sells the cloud, and owns the consumer distribution — while monetizing through ads, subscriptions, and enterprise.
Outlook: The Big Debate Is CapEx vs ROIC
Management guided FY26 CapEx to $175–$185B, largely for AI compute and data centers, with investments ramping through the year. Management acknowledged this will pressure P&L via higher depreciation and operating costs (energy, infra ops) — but framed it as necessary to meet demand and protect leadership.
Here’s Our Take
Alphabet’s Q4 wasn’t just a beat — it was a reframing quarter. Search is growing faster with AI, not despite it, and Cloud is accelerating into what looks like a multi-year demand cycle driven by enterprise AI adoption.
The trade-off is clear: Alphabet is choosing to spend aggressively now to lock in compute capacity, expand Cloud share, and defend Search monetization as user behavior shifts toward conversational and agentic experiences.
The stock reaction will likely hinge less on “did they beat?” and more on whether investors believe this CapEx ramp is building a higher-earning future Alphabet — or simply the cost of staying in the race.
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