Alphabet (NAS: GOOGL) began 2026 with a very strong set of financial results. The firm’s sales grew 22% to $110 billion, with Google Cloud up 63% to $20 billion. The firm’s operating margins expanded 220 basis points, with services and cloud operating margins both expanding year over year.

Why it matters: A year ago, Alphabet was trading as if it had lost the artificial intelligence race. What a difference a year, and clear evidence that the firm is generating strong returns from AI, can make.

  • The clearest way to see these is in Google Cloud, where sales accelerated sequentially and annually. We estimate the firm’s Gemini API sales are now generating around $15 billion in annual revenue, up from a $9 billion run rate last quarter.
  • The firm’s core search business also continues to benefit from AI. We view AI overviews and AI mode as sound moves to stem customer churn to AI-enabled alternatives, while maintaining user engagement and driving search sales growth of 19% in the quarter.

The bottom line: We increase our fair value estimate for wide-moat Alphabet to $433 from $340. The valuation rise is driven by increased confidence in the firm’s ability to successfully monetize its custom silicon, or TPUs, as well as drive large-scale, profitable usage of its LLM, Gemini.

  • We don’t believe we will reach a supply-and-demand equilibrium for AI compute any time soon. This imbalance means that any incremental compute that comes online, via TPUs or Gemini API, meets a buyer willing to pay a pretty penny to acquire it.
  • This pricing dynamic showed up in Google Cloud margins, with cloud margins growing 15 points year over year to 33%. Finally, we believe this supply dynamic will further boost TPU sales, as AI labs and other large compute customers seek to gain access to leading-edge compute.

Coming up: We expect Alphabet to release its new LLM, Gemini 3.5, at the Google I/O in May. We are expecting it to be on par with other frontier models from Anthropic and OpenAI.

Alphabet is an AI leader with its full-stack AI approach driving success across its segments

We view Alphabet as a conglomerate of stellar businesses. With solutions ranging from advertising to cloud computing and self-driving cars, Alphabet has built itself into a true behemoth, generating tens of billions of dollars in free cash flow annually. While antitrust concerns around Alphabet’s core search business have made headlines, we retain our confidence in Alphabet’s overall strength and foresee the firm remaining at the forefront of a variety of verticals, including search, artificial intelligence, video, and cloud computing.

Alphabet’s core strategy is to preserve its strong advertising business, with the majority of advertising revenue coming from Google Search. To that end, the firm has invested considerably over the years to improve its search capabilities, ensuring that its search engine remains deeply embedded in how hundreds of millions of users access information on the web.

We see the firm’s investments in AI as a continuation of this effort to safeguard its core product, Google Search. We believe that by leveraging generative AI, Google can not only improve its own search quality via features such as AI overviews, but also improve its advertising business by augmenting its ability to target customers with relevant ads.

On the antitrust front, we don’t foresee a material deterioration in Google’s search business resulting from governmental or judicial intervention. While there is a range of possible outcomes depending on what remedial steps are imposed, we think it is likely that Google will maintain its leadership position in search and text-based advertising in the long term.

Beyond search, we have a positive outlook on Alphabet’s cloud computing platform, Google Cloud Platform. We believe increased migration of workloads to the public cloud and an uptick in the deployment and usage of AI are key growth drivers for GCP over the next five years. At the same time, we believe that as GCP scales, it will become a more important part of Alphabet’s overall business, both from a top-line and profitability perspective.

Bulls say

  • Alphabet’s core advertising business is deeply entrenched in advertising budgets, allowing the firm to benefit from a secular increase in digital advertising spending
  • The firm’s advertising business generates substantial cash flows that it can reinvest in growth areas such as GCP, AI-infused search, and aspirational projects such as Waymo.
  • Alphabet has a huge opportunity in the lucrative public cloud space as a key cloud vendor to enterprises looking to digitize their workloads.

Bears say

  • While Alphabet is seeking to diversify its business away from search, text-based advertising remains the largest contributor to the firm’s top line, creating a concentration risk.
  • Alphabet’s continued investments in new, often unproven technologies have been a drag on cash flows.
  • Regulators around the world are keying in on Alphabet’s search dominance and could upend the search market through the imposition of deep, structural changes in the space.