Questions about the future of artificial intelligence (AI) have surged in recent months. The biggest question among investors is whether companies can recoup the massive investments they're making to capitalize on demand for AI.
Amid this uncertainty, Alphabet (GOOGL 1.67%) (GOOG 1.76%) sought to answer that question when it reported its quarterly results after the market close on Wednesday. What became immediately apparent is that demand for AI continues to fuel rapid cloud growth, and Alphabet plans to continue heavy investment to capitalize on the opportunity.
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AI strategy is paying off
For the fourth quarter, revenue of $113.8 billion jumped 18% year over year, and 17% in constant currency. Operating margin held steady at 32%, driving diluted earnings per share (EPS) up 31% to $2.82.
To give those numbers context, analysts' consensus estimates called for revenue of $111.48 billion and EPS of $2.64, so Alphabet cleared both hurdles with room to spare.
Google search and the related advertising account for the lion's share of Alphabet's revenue. Fears that AI could funnel ad revenue away led investors to watch the segment results closely. Google's search revenue climbed 17% year over year, which was partially offset by weakness at YouTube, which grew about 9%. In all, Google ad revenue grew 14%, helping quell those concerns for now.
The other area of particular interest to investors in Google Cloud which also serves as the repository for much of the company's AI strategy. Continuing demand for AI services was on full display, as cloud revenue of $17.7 billion surged 48%, accelerating from 34% growth in the third quarter. This far outpaced Microsoft's Azure Cloud growth of 39%, showing that Google is gaining on its rival.
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Key Data Points
Perhaps more telling is the segment's operating margins, which climbed to 30.1%, up from 23.7% in Q3. This shows that Google Cloud is leveraging its assets to drive more profits to the bottom line.
During the earnings call, Alphabet said it sold more than 8 million paid seats of Gemini Enterprise, and noted that the Gemini app now has more than 750 million monthly active users. Furthermore, it's seeing significant increases in user engagement since the release of Gemini 3. As a result, demand for cloud and AI is currently outstripping supply.
It should come as no surprise, then, that Alphabet announced plans to boost its investment in cloud and AI. As such, it expects to roughly double its capital expenditures (capex), spending between $175 billion and $180 billion in 2026, up from roughly $91 billion last year.
Alphabet is sitting in the sweet spot, with accelerating cloud growth and unmet demand. Investors have rewarded the company by driving its share price up 65% over the past year. Despite its success, the search leader is still attractively priced, selling for less than 30 times forward earnings. That makes Alphabet stock a buy.
