Google Cloud's margin trajectory has been one of the most dramatic improvement stories in tech: from -62% operating margin in 2020 to 30.1% in Q4 2025. Full-year FY2025 operating income was ~$13.9B on ~24% average margin, a 950bps expansion from FY2024's 14.1%.
Q4's 30.1% margin is approaching AWS's 35% benchmark. The critical tension is whether this improvement is durable given the massive 2026 capex plan: Alphabet guided $175-185B in 2026 capex (nearly doubling from $91.4B in 2025), with ~60% going to servers and ~40% to data centers. FY2025 depreciation reached $21.1B (+38% YoY from $15.3B), and the 10-K explicitly warns 2026 depreciation growth is expected to accelerate. Assets not yet in service total $78.6B -- a leading indicator of the incoming depreciation wave. Uncommenced lease obligations of $58.5B and a $9.9B power purchase agreement add further cost commitments beyond reported capex.
Key open question
Is the 30.1% Q4 margin sustainable or will depreciation from $175-185B 2026 capex push margins back to low-20s? If $91.4B capex depreciates over 5-7 years, it adds roughly $13-18B per year to the depreciation base.
Is the 30.1% Q4 margin sustainable or will depreciation from $175-185B 2026 capex push margins back to low-20s?
Google Cloud's operating margin improvement from -62% in 2020 to 30.1% in Q4 2025 represents one of the most dramatic profitability transformations in enterprise technology. The quarterly progression in FY2025 alone was remarkable: Q1 17.8%, Q2 20.7%, Q3 23.7%, Q4 30.1%.
Full-year operating income reached ~$13.9B, a 950bps margin expansion from FY2024's 14.1%. Q4 operating income of $5.3B grew 154% YoY. The margin expansion has been driven by revenue scaling faster than cost growth, AI product mix shift toward higher-margin software/platform services, and operational efficiencies. The key risk is whether the massive 2026 capex ($175-185B for all of Alphabet) will generate depreciation charges that pressure Cloud margins back toward the low-20s. At AWS's mature 35% margin benchmark, Google Cloud has approximately 500bps of further margin expansion potential, but the depreciation headwind from doubling infrastructure spend could temporarily reverse the trajectory.
Alphabet's capex trajectory is the single most debated aspect of the investment case: $91.4B in FY2025 (revised up 3 times from initial $75B guidance) and $175-185B guided for 2026, nearly doubling. The 2026 guidance topped analyst expectations by $55-65B.
Approximately 60% goes to servers (TPUs/GPUs) and 40% to data centers/networking. Despite this massive spending, overall ROIC remains strong at ~30%, and the four major hyperscalers' combined ROIC increased by 900+ basis points while doubling capex since 2022. FY2025 free cash flow was $73.3B (nearly flat YoY despite 74% capex increase) as operating cash flow grew 14% to $164.7B. However, hyperscalers are expected to spend ~90% of operating cash flow on capex in 2026, creating significant FCF pressure. Google Cloud remains supply-constrained, with CEO Pichai stating constraints will persist through 2026 and Google must double AI serving capacity every 6 months. Google operates 43 cloud regions and 130 zones worldwide, with major expansion in India ($15B), Sweden, South Africa, Mexico, Kuwait, Malaysia, and Thailand.