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Tepid Reaction to Alphabet’s results sets high bar for Amazon

ADMIN || 5th February 2026

Alphabet’s earnings, and the call that followed, are unlikely to bring much relief to the software and AI stocks that have been getting hammered. On the other hand, at least it went off better than Microsoft last week. The share price fluctuated in post-market trading, and is lower at the time of writing, but it hasn’t moved to take back the 20% gains of the past three months.

Six months ago, investors would have been thrilled with a report like this. Now, they’re merely satisfied. This sets a very high bar for Amazon’s expected earnings Thursday.

Alphabet has been the star of the Magnificent Seven lately amid optimism about both its AI models, and its ability to profit off them in the rest of its business. The business proposition is clearer for a company that blends search, advertising and YouTube as well as cloud computing than it is for, say, Microsoft, which has struggled to articulate a plan to convert AI investment into profit.

And Alphabet shows no sign of slowing its spending. Microsoft projected $115-$135 billion this year, versus expectations of $111 billion, and saw its shares plunge. Alphabet sees $175-$185 billion, against analyst estimates of $120 billion. Alphabet also explained more or less what it will be spending the money on, including servicing a $240 billion backlog of orders. It spent $91 billion in Capex last year, so its 2026 projections are roughly double that. About 60% of that went and will go toward servers, while the other 40% is data centers, networks and equipment.

Despite all the spending, cash flows are holding up. Operating cash flow was $52.4 billion for the quarter, leaving $24.6 billion of free cash flow. That’s pretty much in line with the previous quarter, or the same quarter a year earlier. R&D expense rose 42%, partly because of compensation for AI researchers. The operating margin was 31.6%, in line with previous quarters, but a little less than analysts had expected. One important data point that Pichai mentioned on the call was that the unit cost for Gemini had fallen 78% during last year.

Pichai also commented, obliquely, on the narrative that new AI tech will undermine the business model of SaaS companies, which has driven steep declines in software stocks in the last couple of days, saying he thought AI was an enabler for SaaS companies.

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