Yorkville Ives analyst Dan Ives expects Alphabet's capital spending to approach $315 billion in 2027 as Alphabet adds capacity for contracted AI demand. Ives retained an Outperform rating and a $400 price forecast for Alphabet. Ives identified Google Cloud as the principal growth driver ahead of third-quarter results. Alphabet investors are also assessing the resilience of Search monetization and the rapid increase in AI-related spending.
Ives said Wall Street forecasts third-quarter revenue of $128 billion, approximately 25% above the year-earlier period. Ives said Wall Street expects operating income of $43.2 billion. Ives cited expectations for a 33.7% operating margin and earnings per share of $2.99. Consensus forecasts Google Cloud revenue of $29.1 billion, approximately 90% above the year-earlier period. Consensus expects Cloud operating income of $9.8 billion and an operating margin of 32.5%.
Ives said the central question is how fast Alphabet can recognize revenue from the $514 billion Cloud backlog as additional computing capacity becomes available. Ives also identified Alphabet's custom AI chips as a growth opportunity. Management expects existing chip agreements to generate most of the associated revenue in 2027, making the year-end capacity expansion important for subsequent growth.
Ives said Wall Street forecasts $64.9 billion in Search and other revenue, representing growth in the mid-teens. Ives said YouTube advertising revenue is expected to reach $11.4 billion, approximately 11% higher. Consensus forecasts an 8.4% increase in paid clicks. Ives considers sustained paid-click growth during the introduction of AI-powered Search features an important sign that AI is increasing usage without substantially weakening traditional Search economics.
Ives said consensus forecasts third-quarter capital expenditures of $55.8 billion. Ives said consensus forecasts approximately $202 billion for 2026, within management's range of $195 billion to $205 billion. Wall Street expects third-quarter free cash flow to remain negative at approximately $3.5 billion. Ives considers the elevated spending a response to demand that Alphabet cannot currently satisfy fully, rather than excess capacity. Ives expects Alphabet to keep investing while Cloud demand remains greater than available infrastructure.
Ives said strong results would feature Cloud growth of at least 90%, further backlog growth and paid-click growth in the high-single-digit range. Ives also wants a clearer framework for 2027 capital spending linked to contracted demand. Ives believes those developments would strengthen Alphabet's position as a major beneficiary of enterprise AI spending. Benzinga Pro data showed Alphabet shares up 1.37% at $325.02 at publication on Wednesday.
Alphabet's $514B Google Cloud Backlog and AI Spending Drive Growth Outlook
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Summary
Alphabet’s market outlook remains bullish as Google Cloud’s $514 billion backlog and AI spending drive growth. Capital spending is projected to hit $315 billion by 2027, with Google Cloud expected to generate $29.1 billion in revenue. Analyst Dan Ives keeps an Outperform rating and a $400 price target. Custom AI chips and capacity expansion are seen as key. The fear and greed index currently reflects investor confidence in the tech giant’s long-term potential.
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