Is This AI Stock a Buy After a Game-Changing Earnings Report?

It's not easy for a multi-trillion-dollar business to actually speed up significantly.

Yet that's essentially what Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) did with its first-quarter results, posted yesterday after the market closed. Consolidated revenue grew 22% year over year to $109.9 billion -- the company's fastest growth rate in any quarter since 2022 and its 11th consecutive quarter of double-digit revenue growth.

Investors took notice. Shares jumped about 9% on Thursday, recently trading near $378 as of this writing -- and the search giant's market capitalization climbed past $4.5 trillion.

But after a 12-month run that has more than doubled the stock, the obvious question is whether all of this artificial intelligence (AI) momentum is now baked into shares -- or if some of the company's mind-boggling AI-related metrics suggest there's still more upside ahead.

Image source: Getty Images.

A cloud business defying gravity

While Google Cloud still takes a back seat to Alphabet's massive search business, it still managed to do much of the heavy lifting in Q1.

Cloud revenue jumped 63% year over year to $20.0 billion -- the segment's first time clearing the $20 billion mark in a single period. And its growth rate has accelerated meaningfully too, climbing from 34% to 48% to 63% across the past three quarters.

And profitability is similarly impressive. Alphabet's cloud operating income approximately tripled to $6.6 billion in Q1 -- and the segment's operating margin expanded to 32.9% -- up from 17.8% in the year-ago quarter.

And the forward indicators may be even better.

Google Cloud ended the period with an incredible $462 billion in remaining performance obligations (RPO), nearly doubling sequentially from $240 billion three months earlier. And just over half is expected to convert to revenue over the next 24 months.

Underneath the financials, AI usage is pushing into territory that seemed implausible just a year ago. CEO Sundar Pichai said on the earnings call that Alphabet's first-party models now process more than 16 billion tokens per minute via direct API use -- up from 10 billion just one quarter earlier. And Gemini enterprise paid monthly active users, meanwhile, grew 40% sequentially.

What may be even more telling is that the search giant is having trouble keeping up with all the demand.

"We are compute constrained in the near term," Pichai noted during Alphabet's earnings call, before adding that "our cloud revenue would have been higher if we were able to meet the demand."

The advertising business is benefiting too, with search and other advertising revenue up 19% year over year to $60.4 billion as AI Mode and AI Overviews drove queries to all-time highs.

Huge spending

The flip side of all of this momentum is the bill that comes with it.

First-quarter capital expenditures more than doubled year over year to $35.7 billion -- and management raised its full-year 2026 capital expenditure guidance to a range of $180 billion to $190 billion -- up from a prior range of $175 billion to $185 billion.

That spending has begun to bite. Free cash flow for the quarter (operating cash flow less capital expenditures) fell 47% year over year to $10.1 billion, even as cash from operations climbed 27% year over year to $45.8 billion. Further, depreciation tied to this new infrastructure will continue to pressure margins for the foreseeable future.

And brace yourself. Spending will likely get even bigger next year.

Alphabet Chief Financial Officer Anat Ashkenazi told analysts that 2027 spending will increase "significantly" from this year's already elevated levels.

Is Alphabet stock a buy now?

Shares certainly aren't the bargain they used to be. When you strip out the $2.35 per-share net effect of Alphabet's Q1 gain on equity securities from the company's trailing-12-month earnings per share, shares currently trade at a price-to-earnings multiple in the 30s.

Put another way, the recent surge in Alphabet's stock price leaves less margin for error if cloud demand softens or if capital expenditures don't generate the strong returns over the long haul that investors are hoping for.

And other risks deserve attention, too. The recently closed acquisition of Wiz -- a cloud and security AI platform -- is expected to weigh on Google Cloud's operating margin by a low single-digit percentage point for the rest of 2026, management explained during the company's first-quarter earnings call. Further, competition from Microsoft and Amazon in cloud computing isn't easing.

Still, when a business of this scale is accelerating rather than slowing -- and doing it across both legacy advertising and emerging AI-driven cloud workloads -- it's hard to argue the stock is unattractive -- even at today's premium valuation. Sure, the risk-reward may not be quite as compelling as it was when shares traded near $300 a few months ago, but for long-term investors with the patience to ride out the heavy investment phase ahead, this still looks like one of the more durable AI franchises out there.

So, is Alphabet stock a buy today? I think so, but I'd keep any position size small to account for the risks -- particularly those related to intense competition in cloud.

Daniel Sparks and his clients have 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.