Google Cloud Revenue Surges 48% in Q4 as CapEx Guidance Nearly Doubles: Why the 7.5% After-Hours Dip?

TradingKey - After the market close on February 4, Eastern Time, Google (GOOG) (GOOGL) released a stellar Q4 earnings report: total revenue grew 18% year-over-year, hitting a new quarterly record after revenue first topped $100 billion in the third quarter. The standout was Google Cloud, where Q4 revenue surged 48% to $17.7 billion, a growth rate that significantly exceeded the 35% previously expected by analysts.

However, the market reaction was perplexing: the stock initially fell 7.5% in after-hours trading, with approximately $350 billion in market value evaporating instantly, before reversing to a gain of over 4%, causing the market capitalization to fluctuate wildly by about $800 billion within minutes. Currently, Google is down about 1.76% after-hours. Analysis suggests this indicates that investors are torn between AI investment and monetization capabilities.

A $185 Billion AI Bet: Has Google Gone Too Far?

Google revealed during its earnings call that it expects full-year capital expenditures for 2026 to be between $175 billion and $185 billion, with investment increasing sequentially by quarter. This is nearly double the full-year spending for 2025 and nearly 50% higher than the market expectation of $119.5 billion. Google's full-year spending for 2025 was $91.45 billion, which is roughly in line with the company's projected range of $91 billion to $93 billion for 2025.

Google CFO Anat Ashkenazi stated that, similar to 2025, approximately 60% of the 2026 capital expenditures will be allocated to AI servers, while 40% will go toward long-cycle assets such as data centers and networking equipment. Google CEO Sundar Pichai explained that this scale of spending is intended to support the development of frontier models by Google DeepMind and to meet surging demand from cloud customers.

He noted that despite continuous efforts to ramp up capacity, the company remains in a supply-constrained state. This year's capital expenditure is focused on future demand, and it is expected that the company will continue to operate under supply constraints throughout the year.

Although Google had "previewed" that capital expenditures would increase this year, market reactions suggest that this nearly doubled spending still unnerved investors. This is understandable, as even Ashkenazi warned that depreciation expenses will rise significantly alongside increased infrastructure investment; the growth rate of depreciation is expected to accelerate in Q1, and the full-year 2026 depreciation growth rate will rise significantly, placing sustained pressure on the income statement.

However, some analysts interpreted this as Google's determination to pivot fully toward AI. In November 2025, Google released the Gemini 3 large model, which became one of the most important milestones in its transformation journey. The model outperformed competitors in benchmarks, even prompting rival OpenAI to trigger a "code red." Monthly active users for Gemini applications exceeded 750 million in Q4, up from 650 million in the third quarter. For Google, ramping up capital expenditures at this juncture seems more like an effort to capitalize on its momentum.

48% Growth: The Rationale Behind Doubling the Budget

Google Cloud emerged as the biggest highlight of the Q4 earnings report, with revenue surging 48% year-over-year to $17.7 billion, exceeding analyst expectations of $16.2 billion. This growth rate also represents a significant acceleration from the 34% recorded in Q3. Google Cloud's backlog grew 55% quarter-over-quarter and more than doubled year-over-year, reaching $240 billion by the end of the fourth quarter.

In terms of profitability, Google Cloud's Q4 operating income reached $5.3 billion, 2.5 times the $2.1 billion profit from a year ago and far exceeding the $3.7 billion expected by analysts. This growth was primarily driven by strong demand from enterprise customers for AI infrastructure and AI solutions.

Pichai stated that this robust growth is attributable to Google's strengths in AI infrastructure: in addition to GPUs from its partner NVIDIA, Google has also been developing its own TPUs for a decade, which have already yielded fruitful results.

Google's share price declined as capital expenditures exceeded expectations, which may remind investors of Microsoft (MSFT) last week's experience: Microsoft's capital expenditures for Q2 of fiscal year 2026 grew 66% year-over-year to a record $37.5 billion, exceeding consensus estimates, but revenue growth for its core Azure and other cloud services decelerated, causing the stock to plummet 12% in a single day.

The core reason for Microsoft's sharp decline was a mismatch between spending and earnings expectations. Since 2025, major tech firms have been scaling up capital expenditures to support AI infrastructure; however, this increasingly unrestrained expansion has also made investors more wary. While investors can tolerate massive spending when performance is solid, Microsoft's heavy investment instantly loses its legitimacy and becomes a major concern for investors when growth in its core Azure business fails to gain momentum even with heavy spending.

However, some analysts pointed out that Google's situation is entirely different from Microsoft's. Although Google's capital expenditures are even more 'aggressive' than Microsoft's, Google Cloud's profitability is also significantly stronger. DA Davidson analyst Gil Luria stated that Google Cloud's growth significantly exceeded market expectations and, more importantly, outperformed Microsoft Azure for the first time in years, providing a sound justification for the increased capital spending. Historical earnings data shows that Google Cloud's revenue growth climbed quarterly throughout 2025, from 28% in Q1 to 48% in Q4, fully proving that this investment is profitable.

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder, believes Google's situation may be more like Meta's: as long as new products continue to emerge and growth remains high, investors have the confidence to accept aggressive spending plans.