NextFin News - As the 2025 year-end earnings season reaches its climax, Wall Street is shifting its focus from the sheer scale of artificial intelligence spending to the efficiency of its returns. On February 6, 2026, Gil Luria, a senior analyst at DA Davidson, provided a bullish assessment of Alphabet Inc.’s financial trajectory, asserting that the technology giant is achieving "very good returns" on its massive capital expenditures. This endorsement comes on the heels of Alphabet’s Q4 2025 earnings report, which saw the company surpass $400 billion in annual revenue for the first time in its history.
According to MSN, Luria’s analysis emphasizes that Alphabet is no longer just building infrastructure but is actively reaping the rewards of its AI-first strategy. The company reported Q4 revenue of $113.8 billion, an 18% year-over-year increase, driven largely by a 48% surge in Google Cloud revenue, which reached $17.7 billion. Crucially, the Cloud division’s operating margin expanded to 30%, a milestone that Luria suggests validates the billions of dollars poured into data centers and proprietary silicon over the past two years. While the market has been wary of a "Capex cliff," Alphabet’s ability to maintain a 32% overall operating margin while doubling down on investment has provided a robust counter-narrative to skeptics.
The underlying cause of this high return on investment (ROI) is Alphabet’s successful vertical integration. By utilizing its own Tensor Processing Units (TPUs) and the newly launched Gemini 3 model, the company has significantly lowered the cost of serving AI queries. According to The Futurum Group, Gemini serving unit costs declined by 78% throughout 2025. This efficiency allows Alphabet to scale AI-native experiences across Search and YouTube without cannibalizing existing revenue streams. CEO Sundar Pichai noted during the earnings call that AI Overviews are actually expanding query volume, particularly in complex commercial categories that were previously difficult to monetize.
However, the scale of future spending remains a point of intense scrutiny. Alphabet has guided for 2026 capital expenditures to reach between $175 billion and $185 billion—nearly double the $91 billion spent in 2025. According to CIO Dive, this "eye toward the future" is necessitated by persistent supply constraints in compute capacity. Luria argues that this spending is defensive and offensive; it secures Alphabet’s lead in the "Agentic AI" era, where autonomous systems perform multi-step tasks for enterprises. With a cloud backlog that has doubled to $240 billion, the demand side of the equation appears sufficiently robust to absorb the increased capacity.
From a broader market perspective, Alphabet’s performance signals a "Great Convergence" in the technology sector. While the "Magnificent 7" stocks led the market through 2024 on pure speculation, the 2026 landscape is defined by rigorous ROI audits. Luria’s positive outlook suggests that Alphabet, along with Meta, has successfully navigated the transition from the infrastructure build-out phase to the monetization phase. This contrasts with other peers who are still struggling to prove that their AI "trains" are carrying profitable cargo. The fact that AI agents now generate approximately 50% of Google’s internal code further illustrates how the company is using its own technology to drive operational leverage and margin expansion.
Looking ahead, the sustainability of these returns will depend on Alphabet’s ability to navigate a complex regulatory and energy environment. As U.S. President Trump’s administration continues to emphasize American technological dominance, the pressure on hyperscalers to secure "Compute Sovereignty" has intensified. The massive 2026 Capex budget is partly a response to this geopolitical reality, as companies race to build domestic data center capacity. Luria and other analysts expect that as the industry moves from "Training" to "Inference," Alphabet’s custom silicon advantage will become even more pronounced, potentially leading to a sustained period of high-margin growth that justifies the current investment frenzy.
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