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Search giant Google Inc’s (tickers: GOOG; GOOGL) Q1 2026 results – released on April 29, 2026 – beat consensus estimates for earnings per share (diluted) by posting $5.11 for the quarter against an expectation of $2.62-2.67.
Given that the stock price rose by around 5% subsequently, breaking down how this was achieved becomes germane.
Trend AnalysisWhen analyzing trends in key line items in the recently reported quarter vis-a-vis prior Fiscal Years (FYs), a sizeable disconnect between net income and operating income stands out.
Source: Company Information; Leverage Shares analysis
For a company as large and complex as Google, it bears noting that operating income can typically be considered as the best indicator of performance. Since FY 2021, the performance of operating income and net income have been at odds – sometimes they’re directional, sometimes they’re oppositional in terms of trends.
In Q1 2026, this can be attributable to its large portfolio of non-marketable equity securities comprised of startups and private tech firms. In Q1 2026, the valuation of these holdings was marked up significantly and added billions to net income that didn’t exist in 2025. Relative to the net gain on equity securities in Q1 2025 which stood at a little under $9.8 billion, Q1 2026 recognized a gain of a little over $36.9 billion – a massive 278% growth.
These holdings are collectively referred to as “Other Bets”, within which the standout in valuation has been Waymo, which concluded a $16 billion funding round in February 2026 that took its overall valuation to an eye-watering $126 billion.
Google also holds a multi-billion-dollar stake in Anthropic, where some reports suggest that it’s trending towards a nearly trillion dollars in long-term trajectory. Now, while reports of this nature could have substantial hyperbole embedded in them, the suggestions inject a fair bit of necessity in recognizing the potential gain periodically. With Anthropic’s valuation reportedly ballooning toward the high double-digits (and some reports suggesting it’s tracking toward a nearly trillion-dollar long-term trajectory), periodic valuation adjustments contribute heavily to the volatility of this investment’s value.
Now, given the valuation volatility, it’s almost entirely impossible to subtract out the “non-market” value reliably to estimate for the entire current FY. But it isn’t entirely unreasonable to estimate a trend of a potential 8-12% EPS (diluted) growth for the entirety of FY 2026.
This becomes apparent when considering operating margins across the company’s segments in Year-on-Year (YoY) terms: “Other Bets” went from -272% in Q1 2025 to -511% in Q1 2026, “Services” went from 42% to 45% while “Cloud” went from 18% to 33%.
A strong question to ask at this point would be: is AI helping bring efficiencies in the company’s data- and compute-intensive “Search” business? “Search” is the company’s mainstay: in Q1 2025, “Search” is 75% of advertising revenue, 66% of “Services” revenue, and 56% of total revenue; in Q1 2026, it stood at 78%, 67% and 55% respectively.
While the company hasn’t presented a quantified answer to this question, it did add context by stating that “Search” had a strong quarter that was driven by AI experiences and queries reaching an all-time high, leading to a 19% YoY revenue growth.
So, with volatility from “non-market” investments and AI-driven “Search” efficiencies potentially leaving “Search” flat in contribution for FY 2026, the true driver of interest should (and is) the “Cloud” segment which, as evidenced by the burst in operating margin efficiency, should be in focus.
The company stated that revenues for “Cloud” has a backlog that has nearly doubled QoQ (“quarter-on-quarter”) to nearly $460 billion. It also highlighted that the Gemini App saw its strongest ever quarter for consumer AI plans while Gemini Enterprise has shown 40% QoQ growth in paid monthly active users. Gemini leans on the infrastructure built up within “Cloud” to deliver its services.
However, it bears noting that “Cloud” has gone YoY from 14% of total revenue to 18%. While the AI story is interesting and potentially meaningful, “Search” still dominates overall revenue and profitability for the company.
Source: Company Information; Leverage Shares analysis
In terms of regions, the United States remains the predominant revenue generator for the company and shows a largely stable mix. With “Cloud” becoming more important as support for revenue growth, investments would be in order to set up to go global by going local, i.e. set up datacenters in different regions of the world for both client reach and low latency in service delivery.
Perhaps unsurprisingly – given the fact pattern – the company has issued senior unsecured notes to $31.1 billion in debt, taking long-term liabilities to $77.5 billion.
In ConclusionIf “Search” is trending flat, “Cloud” will have to do the heavy lifting for the rest of the FY and – arguably – should be the focus for investors. With nearly half of all datacenter projects cancelled or delayed1 in 2026 due to a variety of factors including equipment shortage and intense grassroots opposition, Google’s “Cloud” facilities/partner network might be able to command stronger pricing going forward if enduring enterprise demand continues.
However, this also means that AI-driven efficiencies in its mainstay might also face in uptick in cost attributed. If datacenter capabilities are a bottleneck, the company will have to do a balancing act between what drives its company’s bottomline versus where growth is coming from.
Given that it is a “Big Tech” company, valuations were already stretched. In the month leading up to the earnings, the company had piled on nearly 20% in value already. While, the company has done well, that was entirely expected. Meanwhile, the true meaning of its earnings expansion that isn’t intrinsic to the company’s core operations is likely to begin percolating through the market.
Given all of that, profit-taking – and some fairly intensive price discovery – is almost inevitable over the next 2-3 weeks.
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