Alphabet’s stock has surged an impressive 130% in the last year, driven by strong performance in Google Cloud and its core services. However, the company’s escalating capital expenditures, particularly projected increases in 2027, coupled with a higher valuation, suggest a shift from a strong ‘buy’ to a more cautious ‘hold’ recommendation for investors.
Alphabet (NASDAQ: GOOGL, GOOG) has achieved a remarkable feat rarely seen in the mega-cap stock arena, nearly doubling its value and then some over the past 12 months with an impressive 130% surge. This stellar performance has propelled the search giant's market capitalization into close contention with Nvidia, even accounting for recent minor pullbacks.
Previously, I've advocated for Alphabet as a buy, citing the inflection point of Google Cloud and a compelling price-to-earnings ratio relative to its growth trajectory. While this thesis has proven fruitful, the company's first-quarter earnings have intensified the financial calculus, despite underlying business operations running at full throttle.
Image source: Getty Images.
Demand Outpacing Supply: A "Compute Constrained" Cloud Powerhouse
Alphabet's first-quarter results, released in late April, provided robust justification for the stock's recent ascent. What's particularly striking is that these impressive figures could have been even stronger had supply chains kept pace with demand.
Alphabet CEO Sundar Pichai acknowledged this challenge during the company's first-quarter earnings call, stating, "We are compute constrained in the near term," and adding, "our cloud revenue would have been higher if we were able to meet the demand." This statement is significant given the company's substantial momentum in cloud computing, even amidst supply limitations.
Google Cloud revenue experienced a dramatic 63% year-over-year increase, reaching $20 billion – an acceleration from the 48% growth reported in the preceding quarter. Even more compelling is the segment's backlog, which measures contracted but unrecognized revenue. It nearly doubled sequentially to over $460 billion, effectively securing approximately six years of cloud sales at the current run rate.
The broader business also demonstrated resilience. Total revenue grew 22% year over year to $109.9 billion, marking the company's fastest growth rate since 2022 and an improvement from 18% in Q4 2025 and 16% in Q3. Google Services revenue climbed 16% to $89.6 billion, driven by a 19% increase in "Google search and other." The company also reported 350 million paid subscriptions across its products and a 5% dividend increase approved by its board.
Key Data Points
- Market Cap$4.7T
- Day's Range$384.03 - $392.75
- 52wk Range$147.84 - $392.82
- Volume976K
- Avg Vol31M
- Gross Margin60.43%
- Dividend Yield0.22%
The Emerging Challenge: Rising Capital Expenditures and Valuation
Despite the strong performance, the significant investments required to meet AI demand are becoming a focal point. Alphabet's capital expenditures reached $35.7 billion in the first quarter alone. Furthermore, management has revised its full-year 2026 spending forecast upwards to between $180 billion and $190 billion, an increase from the previous range of $175 billion to $185 billion.
The most significant revelation, however, pertained to 2027. Chief Financial Officer Anat Ashkenazi indicated during the earnings call, "As a result, we expect our 2027 capital expenditures to significantly increase compared to 2026." This forecast implies a substantial step-up in investment beyond the already heightened 2026 projections.
To put this into perspective, Alphabet's full-year 2024 capital expenditures were $52.5 billion, rising to $91.4 billion in 2025. If the 2026 range is realized, the company will have more than tripled its annual capital expenditures in just two years, with a further significant increase anticipated for 2027. While this aggressive investment strategy could yield substantial rewards if AI demand continues to soar, the elevated spending outlook leaves less room for error.
Valuation is also a pertinent consideration. Alphabet's price-to-earnings ratio hovers around 29, which, while not alarming for a company experiencing such rapid growth, is no longer the bargain it once represented. Moreover, increased depreciation from this heightened spending cycle is expected to impact future margins.
It is crucial to note that this analysis does not signal a bearish outlook on Alphabet. The company's diversified business model, encompassing search, YouTube, cloud computing, and a rapidly expanding subscriptions segment, coupled with a strong balance sheet, positions it as a well-rounded investment in the AI landscape. Therefore, the recommendation is not to sell. However, following a 130% stock appreciation and an increasingly upward trajectory in spending forecasts, current shareholders enjoying substantial gains might consider pausing before adding further to their positions at the present valuation. Alphabet's stock may now be more appropriately characterized as a 'hold' rather than a 'buy'.
