CEO Sundar Pichai Just Delivered Incredible News For Alphabet (GOOGL) Investors

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) is best known for its industry-leading search technology, and for good reason. While estimates vary, Google continues to dominate with a roughly 90% market share. In recent years, however, the focus has been on the company's emergence as a force in cloud computing and -- more recently -- its prowess in artificial intelligence (AI).

That shift was front and center when Alphabet reported its financial results, as the company's cloud growth stunned market watchers, fueled by surging demand for AI.

Image source: The Motley Fool.

In the first quarter, Alphabet's revenue grew 22% year over year to $110 billion, marking the 11th consecutive quarter of double-digit growth. Its operating margin increased by 200 basis points to 36.1%, driving strong profit growth, as net income of $62.6 billion fueled earnings per share (EPS) of $5.11, which jumped 82%.

For context, analysts' consensus estimates called for revenue of $107 billion and EPS of $2.63, so Alphabet sailed past even the most bullish expectations.

There was a lot to like in the company's financial report. Search revenue grew 19%, advertising revenue -- long Google's bread and butter -- increased 16%, and YouTube revenue grew 11%.

Perhaps the most highly scrutinized segment is the company's cloud computing business, which has emerged as Alphabet's key growth driver -- and it did not disappoint. Google Cloud revenue surged 63% to $20 billion, with its operating margin expanding to 33%, up from 18% in the prior-year quarter.

Yet that was just the tip of the iceberg. Management noted that demand continued to exceed supply, even as the company scrambled to build out its data center capacity. Perhaps more telling was the fact that Google Cloud's backlog nearly doubled to $462 billion. Management expects about 50% of that to convert to revenue over the next 24 months.

To support that growth, Alphabet increased its forecast for capital expenditures (capex), raising its 2026 range to $180 billion to $190 billion, up from $175 billion to $185 billion.

One of the recent drivers of Alphabet's cloud growth is demand for the company's Tensor Processing Units (TPUs) -- Google's homegrown AI chip series. The company recently unveiled the TPU 8t and TPU 8i, custom-built chips designed to handle the compute-intensive workloads of AI training and inference. Creating a specialized chip for each of these broad categories makes them more efficient at their respective tasks, saving users time and money.

Management noted that demand for its TPUs was "unprecedented," leading Google to sell some of its AI chips to "a select group of customers." The company also noted that these new hardware agreements opened up a new revenue stream for Alphabet. Deals involving the sale of TPUs will be included in Google Cloud's backlog going forward.

Last, but certainly not least, Alphabet announced a 5% increase in its dividend, with its quarterly payout rising to $0.22 per share. The yield is a seemingly paltry 0.22%, but that's understandable given that the stock has soared 117% over the past year (as of this writing). Moreover, with a payout ratio of less than 8%, there's plenty of potential for future increases.

Alphabet stock isn't the screaming buy it was just a year ago, but at 28 times next year's expected earnings, it's still reasonably priced. That's especially true given the solid performance of its advertising business, the accelerating growth of Google Cloud, and the "unprecedented" demand for its AI chips.

Taken together, that makes Alphabet stock a buy.

Danny Vena, CPA has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.