Alphabet 1Q26 earnings: Is the stock still a buy after a 28% year-to-date rally?

Key Points

Shares of Alphabet have surged close to 15% since releasing stellar first-quarter 2026 results on 30 April 2026, as the company displayed clear monetisation of its AI spending. The stock has rallied over 28% year-to-date as of 14 May, making it the best-performing Magnificent Seven stock in 2026.

After a substantial run, investors are asking the critical question: Is Alphabet still a buy at current levels?

Figure 1: Alphabet’s shares rallied post-Q1 earnings

AI momentum drives earnings beat

Alphabet delivered an outstanding quarter, with revenue rising 22% year-on-year to USD 109.9 billion, ahead of consensus estimates of USD 107.1 billion. This marked the company’s 11th consecutive quarter of double-digit revenue growth.

Google Services revenue increased 16% to USD 89.6 billion, with Google Search & Other revenue up 19% to USD 60.4 billion, YouTube advertising revenue up 11% to USD 9.9 billion, and Google subscriptions, platforms and devices revenue up 19% to USD 12.4 billion, supported by strong demand for YouTube subscriptions and Google One AI plans. The lone soft spot was Network advertising, which slipped 4% year-on-year, though this segment is a relatively small and declining slice of the overall pie.

Google Cloud delivered the quarter's standout result, with revenue surging 63% to USD 20.0 billion. Growth was broad-based, spanning enterprise AI solutions (including Gemini 3), AI infrastructure (driven by TPU and GPU deployment), and Google Cloud Platform (GCP) services.

Meanwhile, Other Bets revenue declined 8.7% year-on-year to USD 411 million, reflecting the deconsolidation of companies like Verily and GFiber from Alphabet. Waymo nevertheless continues to scale rapidly, surpassing 500,000 fully autonomous rides per week while expanding operations into additional US cities.

Alphabet’s diluted earnings per share came in at USD 5.11, significantly above consensus estimates of USD 2.62. However, investors should note that the figure was boosted by USD 36.9 billion in unrealised gains from non-marketable equity securities (Alphabet's private investment portfolio). These paper gains contributed approximately USD 2.35 to EPS. Excluding this non-operating benefit, adjusted EPS would have been roughly USD 2.76 — below last year's comparable quarter, but still comfortably above consensus expectations.

Table 1: Alphabet Q1 earnings

Management did not provide explicit revenue guidance for the second quarter but raised its full-year 2026 capital expenditure (CAPEX) guidance to between USD 180 billion and USD 190 billion, up from the previous USD 175 billion to USD 185 billion range. The increase includes investments tied to the acquisition of Intersect, a provider of data centre and energy infrastructure solutions. Management also indicated that 2027 CAPEX will increase significantly as Alphabet races to meet surging AI compute demand.

Search is becoming stronger, not weaker, in the AI era

For some time, investors feared that large language models (LLMs) such as ChatGPT and Perplexity would eventually disrupt Google’s search dominance and, by extension, its advertising business. However, Alphabet’s 1Q26 results are the latest evidence that these concerns were overstated. Google Search continues to thrive despite rising competition from AI chatbots, with Google actively embedding AI into Search to improve user engagement and strengthen monetisation.

Search queries are now at an all-time high, with AI Overviews and AI Mode driving greater usage and growth in overall queries. At the same time, Alphabet continues to evolve Search beyond traditional text-based interactions. New multimodal capabilities such as Search Live allow users to interact with Search in more conversational and visual ways, helping Google remain relevant as consumer behaviour evolves.

Figure 2: Search Live allows users to search in real time using their camera and voice

Source: Google Blog (Search Live is expanding globally)

Beyond user engagement, AI is also improving the economics of Google’s advertising business. Gemini models are now being deployed across Alphabet’s ads infrastructure, helping Google better understand user intent in longer and more complex conversational queries. This enables the company to deliver relevant ads for searches that were previously difficult to monetise, expanding Google’s monetisable query base over time.

The company is also rolling out advertiser tools such as AI Max to help advertisers adapt their campaigns to the conversational, context-rich way users now search. More than 30% of customers’ Search advertising spend now uses AI-enabled campaigns, with advertisers seeing higher conversions for the same level of spending. Hilton EMEA, for example, achieved a one-third increase in clicks while reducing spend by 20%, alongside a 55% increase in average booking value.

Importantly, Google is also actively reinventing how advertising works in AI-driven experiences. Rather than simply inserting traditional ads into AI responses, the company is building new ad formats suited for agentic and conversational experiences. For example, Google is testing a new AI Mode ad format that displays retailers selling products organically recommended within a user’s query results.

Taken together, these developments suggest that Search is entering an expansionary phase rather than a decline. AI is increasing query volume, improving monetisation efficiency, and creating new advertising opportunities. By evolving the Search experience instead of merely defending it, Alphabet is positioning itself to remain highly relevant in the AI era.

Google Cloud is a major AI growth engine for Alphabet

While Search remains Alphabet’s primary revenue engine, Cloud has increasingly become its main growth driver.

Google Cloud revenue surged 63% year-on-year in 1Q26, accelerating significantly from 28% growth a year ago and 48% growth in the previous quarter. This far outpaced the cloud growth rates of Amazon and Microsoft, whose cloud businesses grew 28% and 30% respectively. The strong revenue performance was accompanied by an almost 100% quarter-on-quarter increase in backlog, which reached an impressive USD 462 billion. This represents contracted revenue that has yet to be recognised, with management expecting slightly over half of the backlog to convert into revenue over the next 24 months, providing strong revenue visibility ahead.

Growth was primarily driven by AI solutions, supported by strong demand for Gemini models. Gemini Enterprise — Alphabet’s agentic workplace AI platform — recorded 40% quarter-on-quarter growth in paid monthly active users. Alphabet is also seeing robust demand for AI infrastructure as it continues deploying its custom TPUs (Tensor Processing Units) and GPUs. Management also disclosed that Alphabet will begin delivering TPU hardware directly to select customers’ own data centres on an opportunistic basis, expanding its addressable market beyond traditional cloud services. Meanwhile, Google Cloud Platform (GCP) continued to contribute meaningfully to growth, driven by demand for infrastructure, cybersecurity, and data analytics services.

Importantly, Cloud operating margins continued to expand despite rising capital expenditures. Operating margin increased sharply from 17.8% a year ago to 32.9% — a highly impressive improvement given the scale of Alphabet’s AI investments. Management attributed the margin expansion to strong revenue growth flowing through to profit, process innovation, and operational efficiency.

Strong long-term prospects, but near-term upside appears limited

Alphabet has now convincingly demonstrated its ability to withstand AI disruption fears while simultaneously emerging as one of the biggest beneficiaries of the AI boom. Search continues to grow strongly, AI monetisation is improving, and Google Cloud has become one of the fastest-growing large-scale cloud platforms globally. Importantly, Alphabet is showing that it can monetise AI effectively while continuing to grow margins despite higher depreciation expenses from rising capital expenditures in recent years.

Given these developments, we believe Alphabet deserves a higher valuation multiple than previously assigned. We are therefore raising our fair price-to-earnings (PE) multiple for Alphabet from 22x to 24x, slightly above its 10-year historical average of 22x.

Applying this revised fair PE multiple to our projected 2028 earnings results in a target price of USD 438, implying 9.3% upside from Alphabet’s closing price on 14 May 2026.

That said, following the stock’s strong rally this year, near-term upside appears more limited even though the company’s long-term outlook remains highly attractive. We maintain our Buy rating on Alphabet but believe investors may wish to accumulate gradually through dollar-cost averaging or wait for pullbacks before adding more aggressively.

Table 2: Projections for Alphabet’s earnings

Figure 3: Share prices are driven by earnings growth in the long run

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds a position in Alphabet.