Alphabet Has $514 Billion in Cloud Orders. Here’s What Matters More Than That Number on Oct. 28.

Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) has turned heads with one particular number in recent months: $514 billion. That's the size of the Google Cloud backlog, or the value of customer contracts Alphabet has signed but hasn't yet turned into revenue. This enormous number shows just how hungry businesses are for artificial intelligence (AI) computing power.

But when the tech powerhouse reports third-quarter earnings after the market closes on Oct. 28, I'd argue that other figures will matter more. Let's dive in for a close look.

Image source: Getty Images.

Alphabet at a glance

First, though, let's take a quick look at Alphabet's path so far. You probably use the company's key product daily as you surf the internet, and this is the Google platform. Advertisers, knowing how much time we spend here, flock to Alphabet, making advertising the company's biggest earnings engine. Search and other advertising brought in $63 billion in the second quarter, for a 17% increase.

But as the AI boom advanced, Google Cloud emerged as the star of the show. That unit's second-quarter revenue jumped 82% to $24 billion, while its operating income more than tripled to $8.8 billion. Cloud operating margin widened to more than 35% from about 20% a year earlier. Meanwhile, the backlog climbed about $50 billion from the prior quarter.

Though this is great, a backlog shouldn't be confused with actual revenue. Instead, it's more like a promise. Alphabet says it expects to recognize a little more than half of the $514 billion over the next 24 months, and the rest will come in later. The figure also includes sales of Alphabet's custom AI chips, or TPUs, to customers, with most of that revenue expected in 2027. Of course, investors would love to see a growing backlog on Oct. 28, but there are more important elements to watch.

Here's what I'll watch during the earnings report

First, cloud margins. Alphabet is still supply-constrained, so in the third quarter it plans to use capacity from third parties while it continues its build-out. Management warned this would create slight margin pressure. In the upcoming report, investors hope to see that any decline from the current margin level will be small.

Second, spending and free cash flow. Capital expenditures reached nearly $45 billion in the latest quarter, and free cash flow was negative $5.9 billion. Alphabet raised its 2026 capital expenditure forecast to the range of $195 billion to $205 billion and said spending will keep marching higher next year. Though trailing 12-month operating cash flow of $185.7 billion helps, investors will be eager to see signs that capex is turning into revenue.

Third, Search. Search, representing a huge chunk of Alphabet's revenue, will be a point to watch. AI features have been driving more usage, and the continuation of this is key.

"Bullish on the opportunities"

There's reason to be optimistic about Alphabet's upcoming report. In the last earnings call, Alphabet chief Sundar Pichai said Alphabet has "gotten more bullish on the opportunities ahead" over the past year. And peers have been equally positive, noting sustained AI demand.

Investors should also keep in mind that Alphabet's ad revenue generates the cash flow that helps fund the AI build-out, and the Google platform offers diversification if any AI headwinds arise.

So, how should you approach Oct. 28? A significant backlog number is easy to cheer, but it's only the starting point. If cloud margins hold up, spending shows a path to revenue, and Google Search keeps growing, the rest of this story should look bright. If margins slip or revenue disappoints, even a large backlog may not be enough to please investors.

That said, it's important to hold off on focusing uniquely on one quarter and instead, keep your eye on the long term. Alphabet is profitable, diversified, and investing aggressively to serve AI demand. And all of that makes this tech player a fantastic long-term stock to own, whether you buy before or after Oct. 28.

Adria Cimino 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.