Big Tech earnings season is just getting under way. The early loser is Alphabet's stock. Ironically, the winner comes out of Alphabet too -- it's the company's soaring Google Cloud.

Investors are focused on the outsize capital expenditures that Google Cloud and its competitors need to support the rapid growth of the artificial-intelligence cloud.

Alphabet stock was down 7% the day after it reported its earnings. During its earnings call, Alphabet said that it was raising its already sky-high capex estimate for this year, and reiterated that spending would increase significantly in 2027.

The stock cratered on the news. The reaction ignores what all that money is paying for: AI servers that Google Cloud rents out over the internet. That business has taken Google from a money-losing also-ran in the cloud to a major player. In the process, Google Cloud has grown to become 21% of company sales and, more astoundingly, 22% of operating profit.

In the second quarter Google Cloud reported 82% sales growth, more than double what's been seen recently from the companies it's been chasing, Amazon Web Services and Microsoft Azure. Second-quarter Google Cloud sales rose to $25 billion, 61% of the $40 billion that Wall Street analysts expect industry-leader AWS to report next week. Just two years ago, Google Cloud was 39% the size of AWS.

Even after all the money is spent, Google Cloud still doesn't have enough AI servers to meet demand, and it's renting out third-party capacity from SpaceX.

But the bigger story may be that Google Cloud's profit margins keep increasing. As recently as 2022, the segment lost money. In the second quarter of 2024, it still had just an 11% operating margin. But that's been rising steadily since then. On Wednesday, Google Cloud reported a 36% operating margin, matching AWS' profitability.

This is particularly remarkable because Google Cloud is alone in seeing its profit margin increase in the past year, by 15 percentage points. AWS has seen operating margin slowly erode since the beginning of last year, down 2.4 percentage points on a trailing-12-month basis, according to FactSet.

Microsoft's Intelligent Cloud segment -- which includes Azure as well as server software -- has seen its operating margin decline even faster as the lower margin cloud business eclipses the software portion of the segment. Small and fast-growing clouds like Oracle and CoreWeave are also fighting margin reduction.

The reason for these declines goes back to the mounting capex at all these companies, which finds its way into segment reporting via depreciation expense.

In the second quarter Alphabet's companywide depreciation expense was up 42% from the year before to $7.1 billion, and much of the increase gets accounted for in Google Cloud. But rapid sales expansion is outpacing the growth of depreciation and other expenses.

Google stands above the pack in this regard.

Write to Adam Levine at adam.levine@barrons.com

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July 27, 2026 02:00 ET (06:00 GMT)

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