Deutsche Bank: Watch Alphabet Earnings, Focus on Cloud Business Beyond Capex

Alphabet (GOOG-US)(GOOGL-US), the parent company of Google, is set to release its second-quarter 2026 financial results on July 22, 2026. As markets express widespread concern over excessive spending on artificial intelligence (AI) infrastructure, Deutsche Bank has issued a research report strongly supporting Alphabet's stock price. The report argues that investors should not focus solely on capital expenditure (Capex), but instead pay close attention to the substantial upside potential of Google Cloud.

Cloud Business Growth Expectations Significantly Raised

The core of Deutsche Bank's optimistic outlook for Alphabet lies in the performance of Google Cloud. Analysts have raised their revenue growth forecast for Google Cloud in Q2 from an initial 65% to 70%, and expect growth to further accelerate to 75% in the second half of 2026.

This forecast is supported by three key factors. First, AI computing demand still far exceeds supply, to the extent that Google must lease computing resources from SpaceX to meet demand. Second, as of Q1 2026, Google Cloud's backlog of orders reached $462 billion, a year-on-year increase of 400%.

Third, Deutsche Bank believes the market has severely underestimated the revenue potential of the cloud business. The bank forecasts Google Cloud's revenue will reach $190 billion to $195 billion in 2027, significantly higher than the market consensus of $142 billion. Assuming a 30% profit margin, this incremental revenue would increase earnings per share (EPS) by approximately $1.

Financing and Cash Flow Remain Robust

In response to market concerns about AI spending, Deutsche Bank has indeed substantially raised its capital expenditure forecast for Alphabet, predicting it will reach $325 billion in 2027 (up from a previous forecast of $250 billion) and rise to $365 billion to $370 billion in 2028.

However, Deutsche Bank asserts that Alphabet does not face a "capex squeeze." The report highlights Alphabet's strong financing capacity, noting the company has recently raised approximately $65 billion to $70 billion, including a $10 billion investment from Berkshire Hathaway.

Additionally, the company holds around $127 billion in cash and investments, and is expected to accumulate $420 billion in operating cash flow by the end of 2027. Deutsche Bank emphasizes that investors should focus on the speed of revenue conversion from cloud operations, rather than merely the scale of expenditures.

AI Integration Enhances Advertising Efficiency

Regarding traditional core businesses, Deutsche Bank notes that search has not lost momentum. Data shows that traffic and page views on Google websites improved in Q2 2026. While AI Overview may alter traffic patterns, research indicates advertising budgets are beginning to shift toward AI-driven ads, with advertising efficiency continuing to improve. Deutsche Bank maintains its forecast for Google Search's year-on-year growth in Q2 at 16.5%.

As for the delayed release of the Gemini model, Deutsche Bank views this as a short-term phenomenon, noting that Gemini's web traffic and app downloads remain on a growth trajectory and will not undermine Alphabet's long-term AI competitiveness.