Alphabet’s cloud business posted another quarter of explosive growth, with revenue hitting roughly $20 billion in the first three months of 2026 — a 63% jump from a year earlier. But the company’s stock fell nearly 3% after a report that its next-generation AI model, Gemini 3.5 Pro, is months behind schedule and as the company signaled it will spend even more on infrastructure this year.
Cloud Backlog Nearly Doubles
The cloud backlog, a measure of future contracted revenue, swelled to about $462 billion, nearly doubling from the prior quarter. That suggests enterprise customers are locking in long-term commitments to Google Cloud, even as Amazon Web Services and Microsoft Azure still hold larger shares of the overall market. The backlog figure gives Alphabet a clearer line of sight into future revenue, but it also reflects the scale of the bet the company is making on AI-driven cloud services.
Capex Surge and Margin Squeeze
Alphabet spent $35.7 billion on capital expenditures in Q1, more than double the year-ago figure. The company raised its full-year 2026 capex forecast to between $180 billion and $190 billion, and said the step-up will be even larger in 2027. Those heavy AI buildouts are eating into gross margins through depreciation and power costs before the new capacity is fully utilized. The spending spree underscores Alphabet’s determination to compete in the AI arms race, but it also puts near-term profitability under pressure.
Gemini 3.5 Pro Delay
Bloomberg reported that Gemini 3.5 Pro, Alphabet’s next major AI model, is running months behind schedule. The company did not comment on the timeline. The news came on the same day as the earnings release, and shares slipped nearly 3% after the report. The delay raises questions about whether Alphabet can maintain its momentum in AI against rivals that are also racing to deploy more capable models.
Where Google Cloud Competes
While AWS and Azure dominate enterprise cloud, Google has carved out a niche with AI-native workloads, its custom tensor processing units, and a growing partner ecosystem. The cloud backlog suggests that bet is paying off, but the margin pressure from the infrastructure buildout remains a near-term drag. Alphabet’s edge in custom silicon and its ability to attract AI-heavy customers may help it close the gap, but the path to higher utilization and profitability is still being paved.
The company’s next earnings call will likely face questions about the Gemini 3.5 Pro timeline and when the massive capex investments start to pay off in higher utilization and margins.
