2 Numbers Matter More to Alphabet Stock's Performance Than Anything Else Right Now
Key Points
While Google Search and YouTube get a lot of attention, Google Cloud might be Alphabet’s most important segment today.
Investors remain focused on Google Cloud's impressive revenue growth and customer backlog.
This top AI stock’s current valuation might be considered cheap, which can limit downside.
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Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) established its all-time high price in May. Since that peak, shares have fallen 15% (as of Sept. 11). The latest dip hasn't gotten in the way of what has been a fantastic run.
The Magnificent Seven stock has still soared 43% in the past 12 months. Over the past three years, the shares are up a noteworthy 150%. It can be mind-boggling to see a business of this scale continue to put up these kinds of outsize returns.
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To understand what's driving the momentum, investors should focus on two key numbers. I believe these data points matter more to the Alphabet thesis than anything else right now.
Image source: The Motley Fool.
Find what you're looking for up in the clouds
Alphabet's overall business is in great shape. There's no doubt about it.
In the second quarter that ended June 30, Google Search posted 17% year-over-year revenue growth. The crown jewel segment deservedly gets a lot of attention.
Don't forget about YouTube. The leading video streaming platform registered a 13% top-line advertising sales gain. Subscriptions are growing faster.
However, I think the stock is mostly influenced these days by Google Cloud, the booming cloud infrastructure provider that is seeing tremendous success. It seems that the market is fully focused on its performance.
The first number that matters to investors is 82%. During Q2, this is how rapidly revenue for Google Cloud grew compared to the year-ago period. It was an acceleration from an impressive 63% increase in the first quarter. This division now represents almost 21% of Alphabet's entire revenue base, up from just under 11% exactly three years ago.
The second number investors probably care about most is $514 billion. As of June 30, this was the size of Google Cloud's backlog. It was up considerably from $462 billion just three months before. Of this huge sum, more than half is expected to be recognized as revenue over the coming 24 months. This is a clear indication of the robust demand there is from customers for the cloud products and services Alphabet offers.
Google Cloud puts Alphabet in a very advantageous position in the artificial intelligence (AI) boom. CEO Sundar Pichai touts the company's full-stack approach. "Our continued momentum is driven by our integrated AI portfolio consisting of chips, models, data, security, and agent platforms, all designed to work together," he said on the Q2 2026 earnings call.
Financial weakness can lead to downside
Because the AI trade has captivated the market more than anything else in recent years, it makes sense that Google Cloud, which can be viewed as Alphabet's AI hub for enterprises, has the spotlight on it. The segment's remarkable success has been beneficial for investors.
However, there's a downside to the story. It appears that the most obvious risk facing this business is the possibility that Google Cloud's financial results will start to come in below expectations. If the two numbers mentioned, revenue growth and customer backlog, increase at a decelerating pace in the future, for example, it could negatively affect the stock.
There is so much riding on Google Cloud's success. Alphabet's capital expenditures (capex) totaled $44.9 billion in Q2. This resulted in negative free cash flow of $5.9 billion, the first time that the business bled cash since going public in 2004.
The company's capex is projected to be $195 billion to $205 billion for all of 2026. So much money is being invested in computing capacity, and the investment community's expectations are rising with these expanding figures. The returns must not only be sizable enough to justify these capital outlays, they'll need to continue far into the future.
The good news is that Alphabet shares aren't expensive. In fact, the bulls might argue that they're cheap. The stock trades at a forward price-to-earnings ratio of 22.1. This is a compelling setup to own one of the most dominant enterprises on Earth.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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