Alphabet's cloud backlog has climbed to $514 billion after the company raised its capital spending guidance and kept signing long-term customer contracts. Google Cloud's revenue growth is now accelerating faster than search, and it could overtake search as Alphabet's main growth engine within the next year.
Alphabet's cloud-computing backlog has swelled to $514 billion. Google Cloud's revenue growth accelerated last quarter, with the segment's top line rising 82% to nearly $25 billion. The company has committed to spending $811 billion, mostly on AI infrastructure, to secure the compute capacity needed to fulfill those contracts.
Search still leads, but the gap is narrowing
Search remains Alphabet's cash cow. It generated $63 billion last quarter and grew 17%, the fastest pace of any part of the Google services segment. That segment, which includes search, produced an operating margin of 41.8% last quarter, and search likely earns an even higher margin on its own.
With growth in the high teens and a margin around 50%, search could add about $5 billion in quarterly operating income growth this year. Cloud, however, is catching up on a different track: if its revenue doubles and margins settle near 30%, down from 35.6% now, the segment could add more than $5 billion in quarterly operating income in the back half of the year — matching search's contribution. By next year, as cloud margins expand again, the segment could overtake search as Alphabet's biggest source of growth.
Investors weigh the spending
When management raised its capital expenditure guidance from $185 billion to $200 billion at the midpoint for this year, investors sent the shares lower.
Free cash flow fell negative last quarter, and management said it would remain under pressure in 2027. Even so, with a backlog that keeps growing, analysts expect Alphabet's adjusted free cash flow to surpass its old high of around $50 billion by 2029 and reach $300 billion by 2031, with most of that growth coming from Google Cloud.
The stock currently trades at 17 times trailing earnings, a discount that reflects investor concern over the spending — a gap that could close if cloud's returns match those long-term forecasts.
Source: The Motley Fool
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