UBS Stays Bullish on Cloud Giants Despite $673 Billion in Capex

UBS kept buy ratings on all three major cloud providers this week as their combined first-quarter 2026 revenue reached $84.8 billion, up 39% year over year and 15 percentage points faster than the growth rate recorded in the same period a year earlier. The Swiss bank, in a research note covering Q1 2026 earnings from Amazon, Microsoft, and Alphabet, credited unprecedented AI-related computing demand for the acceleration.

The case rests on more than a single quarter’s numbers. The five largest cloud providers finished Q1 with a combined $2.1 trillion in signed contracts for future services, up 184% year over year. Between $400 billion and $450 billion in new commitments arrived each of the last three quarters, per company filings cited in the note.

Four Consecutive Quarters of Record Sequential Gains

Amazon, Microsoft, and Google generated a combined sequential revenue addition of $6.5 billion in Q1 2026, up 196% from the same period a year earlier. All three have now posted four straight quarters at what UBS called historically elevated sequential gains. The firm expects Q2 2026 to add $8.5 billion in combined sequential revenue, with Wall Street’s own consensus for the remaining quarters running between $8.1 billion and $9.8 billion per quarter. The three clouds broke differently on year-over-year growth rate.

• Google Cloud: 63% year-over-year growth, reaching $20.03 billion in quarterly revenue, a 35-percentage-point acceleration from Q1 2025 and the first time the division has cleared $20 billion in a single quarter.
• AWS: 28% year-over-year growth, reaching $37.59 billion, an 11-percentage-point acceleration over the same 12-month stretch and its fastest quarterly growth rate in 15 quarters.
• Azure: approximately 39% year-over-year growth, held near that pace for four consecutive quarters as Microsoft redirected available capacity toward its own AI products, research, and server migration workloads.

Google’s jump from 48% in Q4 2025 to 63% in a single quarter is the largest sequential acceleration in the group this cycle. AWS moved 11 percentage points over four quarters. Azure’s flat line traces a supply decision. Amy Hood, Microsoft’s chief financial officer, said on the Q3 fiscal 2026 earnings call that customer demand continued to exceed supply, and that Microsoft was balancing new infrastructure deliveries against first-party applications, research, and end-of-life server replacement. She projected modest acceleration in Azure’s growth in the second half of calendar 2026 as capacity deliveries increased.

A $2.1 Trillion Committed Backlog

The aggregate figure covers Amazon, Microsoft, Google, Oracle, and Meta, per company filings cited by UBS. The three largest individual positions break down as follows.

Amazon’s Trainium (Amazon’s custom chip built for large-scale AI training and inference) concentration is the most specific figure in the table. Chip commitments account for nearly two-thirds of the company’s entire cloud backlog, a shift that reflects how quickly enterprise AI procurement moved from general-purpose compute to purpose-built AI hardware over the past 18 months. Amazon CEO Andy Jassy separately confirmed on the Q1 earnings call that the $364 billion figure excluded a new $100 billion-plus commitment from Anthropic made during the same quarter.

Microsoft’s commitment was up $2 billion from the prior quarter, meaning new business continued to accumulate even as the existing stack compounded. Google’s position surged $222 billion sequentially in Q1, its largest single-quarter jump, driven partly by TPU (Tensor Processing Unit, Google’s proprietary AI chip) hardware sale agreements with external customers. UBS characterized the $400 billion to $450 billion in new quarterly commitments across the group as evidence that demand is still accelerating into the infrastructure build.

Azure Tops the Enterprise Preference Survey at 69%

Of the 140 enterprises UBS surveyed, 69% named Azure as their preferred platform for AI infrastructure, with AWS following at 53% and Google Cloud placing third at 27%, down from 31% in an October 2025 survey round. Because enterprises run workloads on multiple clouds simultaneously, these figures don’t add to 100%, but the Azure margin over the field has held consistent across each round UBS has published.

The $37 Billion AI Revenue Run Rate

Microsoft’s AI business crossed an annual revenue run rate of $37 billion in the quarter, up 123% year over year, according to Microsoft’s Q3 fiscal 2026 earnings filing with the SEC. The figure covers AI services running on Azure, revenue from model builders on the platform, and Microsoft’s own tools including Copilot, and excludes workloads drawing only on standard compute or storage. Microsoft 365 Copilot commercial seats crossed 20 million in the quarter, up 250% year over year. Microsoft had disclosed a $13 billion AI run rate in January 2025, making the 18-month move to $37 billion the only public milestone the company has updated on that trajectory.

The $37 billion also excludes revenue from Microsoft’s own MAI model family, the seven in-house AI models unveiled at Build 2026 following Microsoft’s renegotiated OpenAI exclusivity deal, now available to Azure customers through the Foundry platform. AWS reported AI revenues exceeding $15 billion annualized, up more than 100% year over year. Google cited roughly 800% growth in enterprise AI revenues for the quarter, driven by Gemini Enterprise and generative AI model adoption, without disclosing an absolute figure.

Azure’s Supply Constraint and the Preference Lock-In

Hood’s Q3 call cited first-party applications, research, and end-of-life server replacement as competing priorities alongside external cloud demand, a balance she said would hold at least through the end of calendar 2026. External Azure customers are, in effect, competing with Microsoft’s own infrastructure priorities for the same physical capacity.

The UBS survey result sits alongside that constraint. Enterprises named Azure as preferred at 69% after rationing had already begun, pointing to future-contract commitments rather than platform switches. Microsoft’s $627 billion grew by $2 billion in the same quarter the quarterly growth rate held flat.

Google Cloud’s Acceleration and the TPU Hardware Play

Google Cloud crossed $20 billion in quarterly revenue in Q1 2026. Alphabet’s Q1 2026 investor disclosure put the cloud backlog at more than $460 billion, with approximately 50% expected to convert to revenue within the next 24 months. The UBS note reports the precise figure as $462 billion, nearly doubling in a single quarter.

A significant portion of that jump came from TPU hardware sale agreements with external customers. Google historically reserved TPU capacity for internal infrastructure; making the hardware available to outside buyers under contract is a new revenue line for the division. Alphabet CFO Anat Ashkenazi told investors that TPU agreements are included in the $462 billion figure, that a small fraction would convert to revenue later in 2026, and that the majority would be recognized in 2027.

Cloud operating margin reached 33% in Q1, up from operating losses as recently as 2022. Google Cloud ran from loss-making to 33% in four years, the fastest margin progression in the three-cloud group over that stretch, while also scaling quarterly revenue past $20 billion for the first time. The division still trails AWS’s 38%, with the gap narrowing across consecutive quarters.

Alphabet CEO Sundar Pichai said the company remains compute-limited, allocating capacity carefully between internal products and external cloud customers. Enterprise AI offerings became the primary growth driver for the division in Q1 for the first time, with generative AI product revenue up roughly 800% year over year, led by Gemini Enterprise.

Margins Steady at 37% Despite $673 Billion in Capex

Cloud Margins at 37%

The combined operating margin for AWS, Microsoft’s Intelligent Cloud segment, and Google Cloud held at 37% in Q1 2026, unchanged from Q4 2025. AWS ran at 38%. Google Cloud reached 33%, up from 18% in Q1 2025. Microsoft’s Intelligent Cloud segment ran slightly below the group composite, with the overall figure holding flat despite higher AI infrastructure depreciation charges weighing on both AWS and Microsoft, per the UBS note.

Together, the three businesses generated roughly $31 billion in combined operating income at that margin on the $84.8 billion in combined cloud revenue. Google Cloud’s progression from operating losses in 2022 to 33% in four years is the fastest in the group, coinciding with the division scaling from sub-$10 billion to over $20 billion in quarterly revenue.

The $673 Billion Capital Expenditure Build

UBS estimates the five providers will spend a combined $673 billion in capital expenditures in 2026, up 76% from $382 billion in 2025. Alphabet raised its 2026 capex guidance to between $180 billion and $190 billion and said 2027 capex would "significantly increase" from that level. On the Q3 fiscal 2026 Microsoft earnings call, Hood said capital expenditures would exceed $40 billion in the current quarter, putting the company on pace for roughly $190 billion for calendar 2026.

Bank of America has estimated the five largest capex spenders will consume about 90% of their combined operating cash flow on capital expenditures in 2026, up from 65% in 2025. Morgan Stanley projected their combined borrowing to exceed $400 billion this year, more than double 2025’s $165 billion. Free cash flow for the group fell to $200 billion in 2025 from $237 billion in 2024.

The Backlog as UBS’s Answer

Cap-ex keeps climbing, but ROI is evident via ~$2 trillion backlog and accelerating cloud growth.

Jefferies analysts wrote that in a note to investors published after the Q1 2026 earnings cycle. BMO Capital Markets separately cited the backlog as the structural support for what it described as the capex super-cycle.

AWS Bedrock (Amazon’s managed AI development platform) reached 125,000 customers and nearly 80% of the Fortune 100 in Q1 2026, with customer spending growing 170% quarter over quarter, per Amazon CEO Andy Jassy’s Q1 2026 earnings commentary on the company’s official newsroom. The platform processed more tokens in Q1 than in all prior years combined.

Alphabet’s Q1 2026 Form 8-K confirmed that just over 50% of Google Cloud’s $462 billion backlog converts to revenue within 24 months, with TPU hardware commitments converting primarily in 2027.

Disclaimer: This article covers investment research published by UBS and is intended for informational purposes only. It does not constitute financial advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. Readers should consult a qualified financial adviser before making investment decisions. All figures were accurate as of publication.