Author: SosoValue

Alphabet released its Q2 2026 performance: revenue, cloud computing, and advertising business overall exceeded expectations, with Google Cloud's growth once again surpassing the most optimistic buyer forecasts; the company simultaneously raised its full-year capital expenditure guidance and expects to significantly increase investment in 2027, supporting the AI chip, server, storage, and data center supply chain.

However, the rapid growth of capital expenditure has driven free cash flow negative, and the EPS excluding investment income fell short of expectations. Management acknowledged that Gemini still needs to improve in coding capabilities but has not provided a clear timeline or verifiable quantitative targets for catching up. The backlog of cloud business continues to grow, but the growth rate has slowed significantly. Alphabet's stock price fell about 3% after hours.

Q2 Performance: Revenue Exceeds Expectations, Core EPS Slightly Below Expectations

Q2 revenue reached $119.8 billion, a year-on-year increase of 24%, exceeding the consensus estimate of $116.96 billion.

Net profit increased by 297.6% year-on-year to $112.1 billion, with an EPS of $9.11. Among this, the unrealized net gains from equity investment valuation increases contributed $77.1 billion to net profit; after excluding other income, the EPS was approximately $2.85, below the consensus estimate of $2.95.

Therefore, the significant growth in net profit and GAAP EPS was mainly driven by investment income, while the performance of core business is better assessed through operating profit, cloud business growth, and cash flow.

Cloud Business Exceeds the Most Optimistic Expectations, Backlog Growth Slows

Google Cloud revenue reached $24.77 billion, an 81.8% year-on-year increase, further accelerating from Q1's 63.4%, and significantly exceeding the consensus estimate of 64.3% and the buyers' optimistic forecast of 75%.

The backlog for cloud business grew by 11.7% quarter-on-quarter to $514 billion, with an increase of approximately $54 billion in a single quarter, mainly driven by demand for enterprise AI products and TPU orders, with more than half expected to confirm revenue within the next 24 months. However, the growth rate of new backlog orders has clearly slowed compared to previous periods, and whether Cloud can maintain its current growth rate in the future depends on the scale of new contracts, the speed of computing power delivery, and the pace of TPU revenue recognition.

Gemini Enterprise has become an important growth driver for Cloud, with nearly 90% of the Fortune 100 companies using it. The number of model calls processed by customers through APIs has risen to over 22 billion tokens per minute, a 37.5% increase from last quarter's 16 billion, indicating that demand for enterprise AI continues to expand rapidly.

The overall advertising business met expectations:

●Total advertising revenue reached $81.63 billion, a year-on-year increase of 14.4%, slightly above the market expectation of $81.1 billion.

●Search revenue was $63.27 billion, a year-on-year increase of 16.8%, basically in line with the market expectation of $63 billion, but the growth rate was lower than Q1's 19.1%.

●YouTube advertising revenue was $11.06 billion, a year-on-year increase of 12.9%, exceeding the expected $10.8 billion.

●Google Network revenue was $7.3 billion, a year-on-year decrease of 0.7%, still slightly higher than the expected $7.13 billion.

Capex Again Raised, Free Cash Flow Turns Negative

Q2 capital expenditure reached $44.92 billion, a year-on-year increase of 100.5% and a quarter-on-quarter increase of 25.9%. The company raised its 2026 capital expenditure guidance from $180 billion to $190 billion to $195 billion to $205 billion, increasing both the upper and lower limits by $15 billion, and it expects capital expenditures to remain significantly high in 2027.

The continued increase in input reflects that the demand for Google Cloud, Gemini training, and TPU is still constrained by computing power supply, providing long-term demand support for AI accelerators, storage, servers, optical communication, and data center construction.

The corresponding costs have already been reflected in the cash flow. Q2 free cash flow dropped from $10.12 billion in the previous quarter to negative $5.86 billion, with capital expenditures exceeding operating cash flow for the first time. As depreciation, energy, and data center operating costs are gradually accounted for in the profit and loss statement, the market's valuation of Alphabet will increasingly depend on the revenue conversion speed of AI investments and capital returns.

Conference Call: Continued Computing Power Tightness, Gemini 4 Still Needs to Prove Competitiveness

Management stated that the company is still severely lacking in computing power. In Q3, it will temporarily expand third-party computing power rentals to avoid the loss of large customers due to short-term capacity shortages. Third-party computing power costs are relatively high and are expected to exert some pressure on Cloud's profit margins, but will help retain the value of long-term contracts.

This quarter, Google delivered TPU systems to customers for the first time and recognized revenue, but only a small amount of revenue will be recognized in 2026, with the vast majority of existing TPU contract revenue expected to be recognized in 2027. The sale of TPU has expanded from internal infrastructure to external systems, increasing Google Cloud's potential market and enhancing visibility for upstream advanced processes, HBM, servers, and network equipment.

In terms of models, Google has launched the largest scale pre-training for Gemini 4, hoping to regain the lead in next-generation cutting-edge models. Management also acknowledged that the current model’s coding and agent programming capabilities still need improvement. Since Gemini 4 has not announced a clear release time, performance data, or commercialization path, the conference call did not fully alleviate market concerns about Google’s model competitiveness.

This financial report proves that demand for enterprise AI remains strong, and Google Cloud is accelerating the realization of its AI investments. The after-hours decline reflects that the market's assessment standards have further increased: cloud revenue exceeding expectations is still positive, but negative free cash flow, continuously expanding capital expenditures, and the uncertainties of Gemini's cutting-edge capabilities will collectively determine Alphabet's valuation space in the next phase.

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