Alphabet's AI Spending Drives Stock Surge Amid Cloud Growth

Alphabet's stock surged 69.6% over the past year, outperforming the S&P 500 by 49.3 percentage points.

The company's AI spending is seen as a key driver of this growth, with Google Cloud revenue growing 82% to $24.8 billion in Q2 2026 and its operating margin increasing from 20.7% to 35.6% over the same period.

This momentum is attributed to the rapid adoption of Gemini, Alphabet's platform for deploying corporate AI agents, which has a backlog of $514 billion, with half expected to convert into revenue within 24 months.

However, management expects free cash flow to remain under pressure due to high capital spending, which increased from $195-205 billion in the full-year 2026 budget, and cloud operating margins will face a test as Alphabet leans on third-party capacity while building internal capacity.