Alphabet Investors Are Still Underestimating Google Cloud
Key Points
Google Cloud has become a major piece of Alphabet's business.
The growing use of AI has substantially increased the demand for compute, which positions Google Cloud well for the next few years.
Google Cloud is growing faster than Amazon Web Services or Microsoft Azure.
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Google Cloud has been one of the most important parts of Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) business. Although online advertising still makes up the majority of total revenue, Google Cloud's revenue and profits have been accelerating quickly.
Those facts are well known among bullish investors, but long-term cloud computing trends and the acceleration of cloud revenue growth rates suggest that the market may still be undervaluing this opportunity.
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How Google Cloud revenue has accelerated in recent quarters
Google Cloud's growth rates have caught investors and executives by surprise. Alphabet has mentioned "a meaningful acceleration in growth" for the past two quarters when discussing Google Cloud results.
In Q2 2025, Google Cloud's top line rose 32% year over year. Then, the segment posted year-over-year growth rates of 34% and 48% in Q3 and Q4, respectively.
The fourth quarter marked the start of a meaningful acceleration, but that verbiage only made it into press releases starting in 2026's first quarter. That's when Google Cloud's growth rate surged to 63% year over year, followed by 82% growth in Q2 2026.
Not only has Google Cloud's growth rate been outpacing Amazon Web Services and Microsoft Azure, but the growth rate surged from 32% to 82% in one year, and there are no signs that a deceleration is coming. Unsurprisingly, this has lifted Alphabet's overall revenue.
Google Cloud's operating income more than tripled year over year as well, and it made up 21.6% of the company's total profits. It's not far-fetched to expect that Google Cloud could produce half of the company's total operating income within the next two to three years if this kind of growth continues.
Cloud computing momentum should continue thanks to AI
During the Q2 earnings call, Alphabet CEO Sundar Pichai told investors that its artificial intelligence (AI) investments are "redefining what's possible across every part of our business." And in the Q1 press release, he described the technology as "lighting up every part of the business."
AI workloads and large language models like ChatGPT and Grok have substantially increased the demand for compute. Not only does that increase demand for Google Cloud's services, but it also gives Alphabet the flexibility to charge higher premiums for available compute.
Artificial intelligence will be a long-term trend that will bring forth the mainstream use of self-driving vehicles and humanoid robots. The largest companies and enterprises are scrambling to gain market share, and they're willing to invest what is necessary to get the extra compute they need. This environment explains why Alphabet has posted tremendous growth from its cloud segment, and it suggests that better results may be ahead.
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Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.
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