The amount of money being spent on AI compute was plainly evident in Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) second-quarter earnings report. The company is bringing in huge amounts of revenue from its cloud computing division, and it’s spending even more. Overall, cloud computing revenue climbed 82% year over year last quarter.
That marks the fifth consecutive quarter of accelerating revenue growth for the segment, and I expect Alphabet to make it six straight quarters when it reports again in three months. Here’s why that’s so important for investors.
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Can Alphabet’s cloud computing revenue keep accelerating?
Alphabet’s cloud computing revenue reached $24.8 billion last quarter. That’s a run rate of $99 billion. Meanwhile, the company reported a backlog of $514 billion for the division, with approximately half of that set to be received over the next two years. That translates to an average revenue of $128.5 billion per year over the next two years from its backlog alone.
While Alphabet will likely see continued revenue growth over the next two years, I expect it to produce significantly more than the amount in its backlog.
The segment includes its Google Workspace suite and other enterprise solutions. Management noted strong growth in those services, driven by its integration of Gemini, Google’s large language model. Management said its existing customers are exceeding their commitments by more than 50%.
Additionally, management is ramping up sales of its custom AI accelerators, TPUs. TPU system sales accounted for a tiny percentage of revenue in the second quarter, but that could grow quickly in the third quarter and beyond. Alphabet’s inventory climbed from $2.4 billion at the end of 2025 to $10 billion at the end of the second quarter. That indicates a big step up in sales for TPUs next quarter.
Finally, Alphabet’s revenue growth lags its capital expenditure growth. Capital expenditures climbed 100% last quarter, reaching nearly $45 billion. That’s actually a slight slowdown from the first quarter, when capex climbed 107%.
A significant portion of Alphabet’s capex goes toward building data centers. Last quarter, management said 40% of its technical infrastructure spend went toward new data centers and networking equipment (the rest went toward server equipment). Amazon CEO Andy Jassy, who runs the world’s largest cloud computing platform, said it takes about two years for data center spending to start generating a cash return. It’s likely Alphabet experiences the same dynamic. With capex growth just starting to peak, that leaves a long runway for Alphabet’s cloud computing revenue to keep growing.
