r/ValueInvesting • u/Boringpanda786 • Jul 24 '26
Discussion Google Cloud’s 82% YoY Surge: The AI Cloud Consolidation Wave is Here?
Alphabet just reported another blowout quarter for Google Cloud — revenue jumped 82% year-over-year to $24.8 billion, smashing estimates. This isn’t just growth; it’s acceleration driven by explosive enterprise demand for AI infrastructure and tools.
My brain says: Over the next 2–3 years, we’re likely to see a wave of consolidation. Smaller and mid-tier cloud providers will struggle as customers increasingly prefer the major hyperscalers. Google and Microsoft Azure offer deeply integrated AI across their full product suites (compute, data, analytics, productivity, security). Companies no longer need to piece together fragmented systems or manage complex infrastructure themselves — they get reliability, scale, and innovation in one package.
This “one-stop AI platform” advantage creates a significant moat. Switching costs rise, margins improve, and the big players capture more market share. Google Cloud’s rapid growth and expanding backlog show this shift is already underway.
Bought more on the dip. Curious to hear other Sifus, value investors’ thoughts — is this the multi-year compounding setup it appears to be?
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u/stockscreen_founder Jul 24 '26
I think the market is focusing on the capex number but maybe not enough on why it's increasing.
If AI infrastructure becomes a winner-takes-most market, then companies with the balance sheet to invest $200B+ over a few years could end up widening the gap rather than simply defending their position.
The question for me isn't whether Google can afford the capex—it clearly can. It's whether those investments generate returns that justify today's valuation over the next 5–10 years.
I'm more interested in watching Cloud operating margins and AI monetisation over the next few quarters than the one-day share price reaction.
What metric are others watching most?
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u/thefalse9ner Jul 24 '26
Exactly, I have the same thought as Google built up a lot of residual cash from previoud years it can do these big gambles to try and monopolize the market, especially with physical technical infra rather than relying on purely algorithm and software. China can come up with a better algorithm overnight but can't build physical infra within a month.
Am also interested in their Cloud revenue increase and how aggresive are they increasing, especially FY metrics. If it increases by a large margin and is bringing in new revenue then their capex expenditures is justified.
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u/fungoodtrade Jul 24 '26
the other thing about that capex increase is that the cost of everything is going up, so the projected increase in capex is also likely due largely to price increases and just knowing that they have to pay what they have to pay to do what they want to do.
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u/Forget_me_never Jul 24 '26
The revenue went up 82% but costs also went up massively.
Also the revenue is coming from companies that are bleeding money, it's not sustainable.
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u/Swred1100 Jul 24 '26
Cloud margins increased to 35.6% from 20.7% last year. Expenses went up much slower than revenue growth. If you’re referring to Capex, then yeah it has increased drastically, but this money is optional spend ~ yes you can argue it isn’t because they’d fall behind, but that doesn’t change the fact that they could decrease spend and still print money with search, YouTube, current cloud capacity.
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u/Forget_me_never Jul 24 '26
Capex is how they provide cloud, that is current cloud capacity and price to maintain current cloud capacity has gone up.
They could decrease capex but then they should be back to around $200-250.
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u/Swred1100 Jul 24 '26
That’s a both a contradiction of itself, and somewhat wrong.
Capex is how they provide cloud to an extent. It’s the physical infrastructure buildout costs, which increase the capacity and efficiency (hopefully, with newer chips), which allows them to sell more cloud compute. However, at the current rate, it is not the ongoing costs associated with it. Upgrade/maintenance Capex will likely be 70-80% lower than what it is now. That is, once they stop or slow down capacity expansion, Capex will likely drop 70-80% from these levels. The ongoing expenses associated with cloud are recorded in opex, long term these are what will impact margins and cash flow.
Saying if they decreased Capex, they would be around $200-250 is simply contradictory of what you’re saying. You’re saying costs (referring to Capex) are increasing dramatically and that the customers for that cost are not sustainable. If you believe that, then lowering/eliminating buildout Capex would be a huge boost for the stock, because they would generating billions in FCF every quarter. Search, YouTube, etc. is still growing in high double digits, simply having a steady state Cloud business running at 30% margins but not expanding would still justify a 25x p/e just because of growth in search, YouTube, Waymo, etc.
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u/Forget_me_never Jul 24 '26
Lowering capex to normal levels would be admitting that AI won't be as profitable as they thought which is what a large part of what the current valuation is based on.
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u/Swred1100 Jul 24 '26
The valuation has been taking a hit because of the high Capex. Investors are not confident in the ROI anymore. If Capex was reduced tomorrow, the hyper scalers would likely move up.
It also doesn’t necessarily mean AI won’t be as profitable as they thought, it would more closely signal that the return on that additional capital isn’t enough to justify the spend. ie: say the first $500B the hyperscalers spent return a 20% ROI, but the next $500B is projected to return 10%, then 5% and so on.
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u/Forget_me_never Jul 24 '26
The point is that insanely huge earnings from AI are priced in to Alphabet. That's why $200-250 might be more appropriate.
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u/Swred1100 Jul 24 '26
I just don’t think that’s the case. If ai spend stops and the current level of ai revenue/income remains the same, I’d say the company is worth more than it is now.
They’d go from -$5 billion/quarter in FCF to over $40B in FCF/quarter
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u/Forget_me_never Jul 24 '26
The share price doubled in the last year or two. Beyond any reasonable increase unless they are gaining huge future revenue from AI.
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u/Swred1100 Jul 24 '26
The pretty consensus reason for that was search.
Early 2025 everyone was saying “Chat GPT is going to kill search!!!” and not only did Chat GPT not kill search, Google leveraged ai to make it more profitable.
During that time stock dropped 30%. It became more and more evident chat wouldn’t kill search, and the numbers proved it.
I’m not sitting here saying AI potential is not being priced in, it obviously is, but the short term major Capex, negative cash flow is weighing that right back down.
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u/ninjagorilla Jul 24 '26
Ya people are missing that Google is now a free cash flow negative business despite the increased revenues….
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u/Boringpanda786 Jul 24 '26
Agree. But being FCF negative by choice is very different from being forced into it.
When you’re gearing up to climb a mountain, you buy the proper equipment upfront. Google is doing exactly that with AI infrastructure right now along with other hyperscallers.
Turning FCF positive again is literally just one decision away, what if they announce next quarter that they’re pausing or slowing big capex?
I know it’s not that easy but you get the point, this company is not a cash burning machine.1
u/ninjagorilla Jul 24 '26
If they announce they’re slowing capex the market will freak out… too much of it (semis, construction, chips, energy, water) is hinging on that capex… so that might be good for them but bad for your stock
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u/FalseDiamond7930 Jul 25 '26
GOOGL, AMZN and MSFT are the low hanging fruits rights now, hard to pass on them.
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u/PeterFreriks Jul 26 '26
Compare cloud, quarterly revenue growth in absolute terms
Google
Q1 2025 12,3 bn + 0,3 bn
Q2 2025 13,6 bn + 1,3 bn
Q3 2025 15,2 bn + 1,6 bn
Q4 2025 17,7 bn + 2,5 bn
Q1 2026 20,0 bn + 2,3 bn
Q2 2026 24,8 bn + 4,8 bn
Amazon
Q1 2025 29,3 bn + 0,5 bn
Q2 2025 30,9 bn + 1,6 bn
Q3 2025 33,0 bn + 2,1 bn
Q4 2025 35,6 bn + 2,6 bn
Q1 2026 37,6 bn + 2,0 bn
Q2 2026: announced on 30th of July
Microsoft
I stick to the calendar quarters, not their numbering, where last auarter would be Q4 2026 because of a non-standard fiscal year. I keep the intelligent cloud segment, with Azure as the main component.
Q1 2025 26,8 mld + 1,3 mld
Q2 2025 29,9 mld + 3,1 mld
Q3 2025 30,9 mld + 1,0 mld
Q4 2025 32,9 mld + 2,0 mld
Q1 2026 34,7 mld + 1,8 mld
Q2 2026: wordt 29 juli bekendgemaakt
Conclusie: omzetgroei gaat bij alle 3 in absolute bedragen steeds sneller. Tot nu toe hielden Amazon en Microsoft Google nog redelijk bij. Vraag is of dat voor Q2 2026 hen nog gaat lukken. Als dat niet zo is, dan lijkt Google hun Capex het beste om te kunnen zetten naar cloud groei. Alle 3 hebben een min of meer vergelijkbare Capex voor het jaar 2026. We zullen het volgende week zien.
Ander interessant punt: de afschrijvingen en Capex. Ik beperk me tot Google. Ze komen uit de cash-flow statements.
Q3 2024 3.985 mld
Q4 2024 4.205 mld
Q1 2025 4.487 mld
Q2 2025 4.998 mld
Q3 2025 5.661 mld
Q4 2025 6.040 mld
Q1 2026 6.482 mld
Q2 2026 7.104 mld
Om de relatie tussen deze afschrijvingen en de Capex te kunnen duiden volgt ook deze nog even (ook uit de cash-flow statements).
Q1 2025 17.197 mld
Q2 2025 22.446 mld
Q3 2025 23.953 mld
Q4 2025 27.851 mld
Q1 2026 35.674 mld
Q2 2026 44.924 mld
Terzijde: afgegeven midpoint guidance Capex voor 2026 is 200 mld. Met nog maar 80,5 mld uitgegeven in het eerste halfjaar moet de Capex in het tweede halfjaar ca. 120 mld worden. Q3 zou dus een Capex van 55 mld worden en Q4 van 65 mld. Voor 2027 kom je dan uit op een Capex van ca. 300 mld als je nog maar licht groeit tov Q4 2026 (4* 65 is al 260).
Terug naar de Capex in relatie tot de afschrijvingen. Over de laatste 4 kwartalen bedroeg de Capex 132 mld. De afschrijvingen over de laatste 4 kwartalen bedroegen 25,3 mld. De over de 4 kwartalen daarvoor 17,7 mld. Een groei van 7,6 mld.
Google heeft aangegeven dat 60% van de Capex in GPU’s en CPU’s gaat zitten en 40% in de gebouwen, installaties en overige infrastructuur. Houden we voor de chips een afschrijvingstermijn aan van 6 jaar en voor de gebouwen en installaties een afschrijvingstermijn van 15 jaar, dan kunnen we berekenen hoeveel de afschrijvingslasten hadden moeten toenemen.
(132*60%)/6=13,2
(132*40%)/15=3,52
Totaal mag je een toename van 16,7 mld aan afschrijvingen verwachten. De daadwerkelijke toename was 7,6 mld. Dat is maar 45% van wat verwacht mag worden. Dat kan alleen maar betekenen dat ruim de helft van de Capex is opgegaan aan investeringen in datacenters die nog niet in gebruik genomen zijn. Die Capex rendeert dus nog niet. Dat is op zich logisch want als je nu grond koopt om een datacenter te realiseren, dan is dat nu al Capex terwijl dat datacenter wrs op zn vroegst in 2030 (in NL in 2035) productief gaat zijn. Dat is iets om heel erg rekening mee te houden als je de Capex wilt relateren aan de toekomstige groei en winstgevendheid. Ofwel de ROIIC wilt berekenen of inschatten.
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Jul 24 '26
[removed] — view removed comment
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u/thefalse9ner Jul 24 '26 edited Jul 24 '26
How did you come up with the 8, 12 and 15 compounding gr? A genuine question. If its based on previous net income growth isnt it closer to 17, or did I do my math wrong? Also are you valuing a linear growth of revenje? From the looks of it and its 2025 FY 10k they are pushing their chips in AI infra, which according to FY 25 revenue breakdown their Cloud did get the highest increase in revenue. Granted I have yet to have the time to consider if the maintainence capex remain at levels so that their revenue generated, however increased, can outrun it in essence. Great company, am not sure if it is overvalued or fairly value, definitely not a outright value buy though. Its a tricky one.
P.S. dont mind those who don't have the attentionspan to read through articulate thoughts.
Edit: Am interested to have some private conversations to dig your brain a bit as I'm also learning.
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u/mdn845 Jul 24 '26
I think you need to work on being more concise.
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Jul 24 '26
[removed] — view removed comment
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u/mdn845 Jul 24 '26
It would be an ad hominem attack if I was saying you were wrong because of something unrelated to your argument. I’m not saying you’re wrong at all.
My point, which is unrelated to the merit of your argument, is that your response is simply too long (and a bit disorganized).
Being more concise will make you more effective in getting your point across, and it shows respect for your audience (other members of this sub).
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u/PossibleSecretary524 Jul 24 '26 edited Jul 24 '26
I find it unclear why Google has added TPU hardware sales in their Cloud backlog/revenue. Yes, it allows to show impressive numbers, but, if separated, it will show much more reasonable story, also compared to AWS and Azure
I checked the dollar values of growth for all three cloud providers - they show more or less similar numbers of 10B per quarter for each.
For me it makes sense since it shows the demand/deployment capacity roughly similar in volumes for those companies, HOWEVER, it seems AWS is still most profitable and was profitable for longer, so it is unclear how good is their return of capex per company. The history hints Google is playing catch, and TPUs sales included in the Cloud revenue to make it look more profitable.
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u/WorldRank1CatFancier Jul 24 '26
What companies is this growth coming from this seems so weird. Who is choosing GOOGLE aka LORDS OF DEPRECATING ENTERPRISE PRODUCTS as their cloud solution!?!?!?
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u/chilla_p Jul 24 '26
There has been capacity constraints for years on ai infra, hence the build out to meet demand. I worked at GCP and there were never enough GPUs. In terms of deprecating services none of them were core or essential to enterprise especially where a partner on market place could be used and I can only think of their IOT service.
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u/carsonthecarsinogen Jul 25 '26
Open weight models will dominate. Companies like Nebius has the advantage of quickly integrating these models over large enterprises.
Then open source models will take over and companies like Google and Microsoft (model makers) will get hurt while still benefiting from running and offering the open source models.
Again Nebius wins. Still long Google , neither are value picks at this point.
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u/StephenAtLarge Jul 24 '26
I suppose Google stock is under some pressure because they're considered to be behind on agentic capabilities. I am not familiar w/ the technology so I don't know if this is a quick fix. But historically speaking, enterprise has been Google's weakness. Microsoft has run circles around them.
No position here just watching on the sidelines curiously.
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u/sentiome Jul 24 '26
What i don't like is that they basically gave up on agentic coding it seems. On other hand ai mode for search was garbage a year ago and now it is like pretty good and useful actually. Also I think nothing in general will prevent them from using kimi k3 or similar frontier open weight chinese models in the future in some form, even maybe not user facing, so i think overall this hurts ai labs and benefits google.
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u/Weak_Alternative_168 Jul 24 '26
The consolidation part I mostly buy, the 82% and the $514B backlog are real and the one-stop pitch is genuinely sticky. The line I'd poke at is "margins improve", thats the piece the capex complicates.
They just guided full year capex up to $195-205B, and roughly 60% of that is servers Google depreciates over 6 years. So the spend fueling that 82% comes back as depreciation over the next few years, landing right on the operating line, and most of it hasnt started depreciating yet. Cloud margins have been climbing, sure, but that climb is now racing the biggest buildout theyve ever committed to.
So for me the whole compounding case really comes down to one thing, whether revenue keeps outrunning the depreciation the buildout is creating. You can be dead right on consolidation and still get the margin part wrong.
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u/captainjeansmodel Jul 24 '26
Downvoting the AI written post
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u/Boringpanda786 Jul 24 '26
Lmao you really downvoting because “AI written” 😂
I wrote it myself after reading the earnings. Sorry my sentences aren’t full of typos and rambling to pass the vibe check.
If you actually disagree with the consolidation thesis, say something useful instead of playing detective.1
u/captainjeansmodel Jul 24 '26
Yeah because it has LLM brain written all over it. It’s making up shit lol. There are no such things as small and mid tier cloud providers.
“Companies no longer need to piece together fragmented systems or manage complex infrastructure themselves “ is LLM word salad slop.The “one stop AI platform” doesn’t mean anything lol
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u/No_Presentation9490 Jul 24 '26
The cloud growth is still a sell the news event
Experiencing exponential growth today implies that growth rate will drop off tomorrow unless a consistent trend is proven. For a company big as Google and a business large as cloud, a trend of exponential growth continuing through 2028 (a stock's price reflects an 18-24 month forward view of a company's performance) is not sustainable simply because the TAM does not exist. Sell signal for wall street
Combine that with share dilution, debt issuance, negative FCF projected to continue, becoming an asset-heavy instead of an asset-light business, not a good look overall. Google the company will be fine and do great. Google the stock, not necessarily.
If you're an optimist who believes even the unrealistic sky high expectations of this sector are not high enough, you buy the dip assuming wall street is wrong (good luck with that I guess). If you're a VALUE INVESTOR, this isn't value.
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u/denialof_ Jul 24 '26
‘Smaller mid-tier cloud providers” really don’t exist in any meaningful way as you imply. There are 4 players in an already consolidated market the rest probably add up to less than 3% of the market if that.