This Metric From Google Cloud Proves Its $185 Billion in Capital Spending This Year Is Worth It
Alphabet is investing heavily in AI computing resources.
By Keithen Drury
It's no secret that Alphabet (GOOG +1.48%) (GOOGL +1.29%) is spending big in the artificial intelligence (AI) arms race. At the start of the year, it told investors it would spend from $175 billion to $185 billion on capital expenditures in 2026, primarily on data center construction. Since then, management has bumped that range to $180 billion to $190 billion. Those are mind-boggling figures, and the knee-jerk reaction among investors may be that the company is spending far too much.
However, I think that's the wrong way to look at it. There's one metric I've got my eye on that shows that this spending is logical, and indicates that the return on investment could make it all worth it.
Google Cloud's growth is exploding
The data centers that Google is constructing are being used for two primary purposes. The first is for Alphabet's internal needs, but that's not nearly as large as the cloud computing opportunity.
Alphabet isn't the only one hungry for AI compute; a wide array of outside customers are also using its infrastructure to run their AI workloads. These Google Cloud customers are paying for their computing usage every time someone utilizes their AI models. This provides a massive recurring revenue stream for Alphabet, and investors are already seeing the results of its heavy capex spending.
In the first quarter, Google Cloud's revenue rose an impressive 63% year over year. Any company that can grow a business segment that quickly is likely to get a free pass from investors to pour endless resources into sustaining that growth rate.
Furthermore, these aren't just one-time revenues. Because cloud computing is a usage-based system, if Google Cloud's clients want to maintain access to the computing power, they must continue paying Google. Since Alphabet already has many customers lined up for the new computing power it's bringing online, those huge capital expenditures will result in years of strong revenue growth for the company.
But it isn't done yet. While 2026 has been a record-setting year for capital expenditures for many tech companies, Alphabet told investors during its Q1 conference call that in 2027, it will once again increase its capex significantly. That shows that there's still a major gap between supply and demand for computing power, and this could propel Google Cloud to become one of Alphabet's largest segments.
Given that Google Cloud's revenue stream looks to be a bit more stable than its advertising business (where sales are often affected by the macroeconomic outlook), it should be a welcome change for investors. Although Alphabet has been laying out an enormous amount on data center infrastructure over the past few years (and looks likely to keep doing so), the growth rate of the cloud business speaks for itself. I think that makes Alphabet a strong stock to consider among the AI hyperscalers.