Google Cloud's Margin Surge Drives Alphabet's Stock Re-Rating

Alphabet's (GOOGL) stock has seen a significant surge over the past year, gaining 71% compared to the S&P 500's 22%. The main driver behind this run is AI, but a closer look at Google Cloud's performance reveals an even more crucial factor. In its fiscal Q2 2024 report, Google Cloud's operating margin was 11%, which rose to 17% in Q3 2024 and nearly doubled to 20.7% by the end of Q2 2025.

This increase in margin while revenue growth remained steady between 29% and 35% is what sets Google Cloud apart. The segment's scaling efficiency, rather than its growth rate, is the key to its success. This is evident from Alphabet's growing backlog of $106 billion, up 38% year over year, which supports the company's capacity build.

Alphabet designs its own chips, which drive efficiencies and better performance. By fiscal Q2 2026, Google Cloud's revenue had grown 82% to $24.8 billion, with segment operating margin reaching 35.6%. The backlog also reached $514 billion, nearly five times the previous year's figure.

The evidence of Alphabet's growing profitability was present in its reports for over a year before the stock price began to rise. Implied volatility sat at the 54th percentile of its trailing one-year range in late July 2025, indicating that the market did not anticipate the significant re-rating that followed.