Alphabet Q2 Beats Expectations but Faces Sell-Off as AI Capital Expenditure Jumps to $205 Billion, Stock Drops Nearly 4%

Alphabet released its 2026 second-quarter earnings, reporting revenue of $1,198 billion, which exceeded market expectations of $1,169.3 billion. Google Cloud revenue reached $248 billion, up 82% year-over-year, significantly surpassing analysts' estimates of $224 billion. However, the company also raised its full-year capital expenditure (capex) forecast from $1,800 billion to $1,900 billion to a range of $1,950 billion to $2,050 billion, which is significantly higher than the average analyst estimate of $1,880 billion as per Visible Alpha. This increase in AI-related capital expenditure raised concerns among investors about cash flow and return on investment, leading to a nearly 4% drop in Alphabet's stock price after hours.

Alphabet's second-quarter revenue was $1,198 billion, up 24% year-over-year, exceeding market estimates of $1,169.3 billion. Adjusted earnings per share (EPS) were $2.85, slightly below LSEG's estimate of $2.89, but overall revenue performance still exceeded market expectations.

The highlight of the earnings report was Google Cloud. Second-quarter cloud revenue was $248 billion, up 82% year-over-year, far exceeding analysts' estimates of $224 billion and also significantly outperforming the growth rate after surpassing $200 billion in the previous quarter. The company stated that the deployment of AI models, the adoption of Gemini by large enterprises, and new business brought about by the completion of the acquisition of cloud security company Wiz collectively drove the rapid growth in cloud demand. Google Cloud's unfulfilled orders (backlog) also rose to $514 billion, indicating continued improvement in future revenue visibility.

The search advertising business maintained steady growth, with second-quarter Google Search revenue at $633 billion, up 17% year-over-year, but slightly below market estimates of $634 billion. CFO Anat Ashkenazi reminded that due to the significant base increase in the third quarter of last year, the third quarter of this year will face a higher comparison benchmark, and search revenue growth may slow down. The market will closely monitor whether AI search will continue to support the advertising business.

YouTube ad revenue also exceeded market expectations, reaching $110.6 billion in the second quarter, up 13% year-over-year, higher than analysts' estimates of $108.1 billion. Alphabet pointed out that the 2026 World Cup football drove Google search volume to a historic high, with a total of 1.7 billion independent users watching World Cup-related YouTube videos, further boosting platform traffic and ad demand.

AI remained the focus of this quarter's earnings. CEO Sundar Pichai stated that the monthly active users (MAU) of Gemini App have increased to 950 million, processing 220 billion API tokens per minute, higher than the previous quarter's 160 billion, indicating continued rapid growth in model usage. Currently, Google has started investing in the development of the Gemini 4 model, aiming to compete directly with OpenAI and Anthropic in the next-generation large language model competition, and plans to release new model versions almost every month.

Google also simultaneously launched new models such as Gemini 3.6 Flash and Gemini 3.5 Flash Cyber this week, aiming to respond to enterprise customers' demand to reduce AI inference costs with lower token costs and higher efficiency, while counteracting the price competition pressure brought by open-source models from Chinese companies such as DeepSeek, Moonshot AI, and Z.ai.

In addition to Gemini, Google's AI program development tool Antigravity is also growing rapidly, with weekly active users now exceeding 2.4 million. Enterprises can use it with the Google AI Pro plan at $19.99 per month and the Google AI Ultra plan at $99.99 per month. Pichai did not disclose the proportion of paying users. On the other hand, OpenAI recently stated that its Codex and ChatGPT Work have weekly active users exceeding 10 million, indicating that the competition in AI program design tools is continuing to intensify.

Google's ad AI tools, Performance Max and AI Max, are also continuously driving growth. The company pointed out that advertisers adopting the above tools can increase the search conversion rate by an average of about 50% under the same advertising return on investment (ROAS).

Notably, Alphabet raised its full-year capital expenditure forecast for 2026 from the previous quarter's $1,800 billion to $1,900 billion to a range of $1,950 billion to $2,050 billion, significantly higher than the average analyst estimate of $1,880 billion as per Visible Alpha. Of this, second-quarter capital expenditure was $449 billion, up 100% year-over-year, slightly higher than market estimates of $448 billion.

Anat Ashkenazi stated that the increase in capital expenditure is mainly due to AI demand far exceeding supply, and the company is still in an environment where computing power is insufficient. Whether it is external customers of Google Cloud or internal AI services of the group, they all need a large amount of new computing power. Therefore, the company decided to advance the expansion of data centers and servers to meet the continuously increasing demand.

She revealed that in the second quarter, about 60% of AI infrastructure investment was invested in servers, and 40% was used for data centers and network equipment, almost all of which were supporting AI construction.

Due to insufficient internal computing power, Alphabet will also expand the use of third-party cloud computing resources in the third quarter as a transitional measure. The company stated that this move will put some pressure on gross margins in the short term but will help continuously obtain large enterprise AI orders, and the long-term investment return rate is still attractive.

The market also paid attention to Alphabet's recent signing of an AI computing power leasing agreement with SpaceX at approximately $9.2 billion per month, leasing computing resources equipped with NVIDIA GPUs to cope with the surge in AI demand. Meanwhile, Microsoft continues to lease computing power from CoreWeave, Lambda Labs, Nebius, Iren, and Nscale, indicating that global technology giants are all facing the situation of insufficient AI infrastructure. After the news was announced, the stock prices of CoreWeave and Nebius rose by approximately 4% and 5%, respectively, after hours.

Another highlight in the earnings report came from investment income. Alphabet recognized approximately $990.3 billion in equity investment benefits in the second quarter, driving other income to $979.8 billion, pushing single-quarter net profit to $1,121.1 billion, up 298% year-over-year. This was mainly driven by the significant appreciation of the value of its holdings in Anthropic and SpaceX, with Anthropic's latest funding round boosting the company's valuation and becoming an important source of profit for the quarter. However, SpaceX's stock price has since fallen slightly since its IPO, and future investment income still carries volatility risks.

Additionally, Waymo continues to expand its global footprint, currently offering commercial Robotaxi services in 11 metropolitan areas in the United States and testing in another 21 cities, including London and Tokyo. Pichai reiterated that Waymo is expected to begin making substantial financial contributions to Alphabet starting in 2027, while the second quarter 'Other Bets' segment revenue was $3.82 billion, up 2.4% year-over-year.

Analysts believe that Alphabet's operating performance this quarter was overall better than expected, particularly with Google Cloud's growth rate far outpacing competitors. However, search revenue was slightly below expectations, operating profit margins were under pressure, and continued expansion of AI capital expenditure has caused the market to begin reassessing the speed of AI investment recovery. Deepwater Asset Management partner Gene Munster pointed out that Google Cloud's performance is sufficient to support the stock price, but the short-term market focus has shifted to the scale of AI spending and future profitability, hence the stock price is under pressure.

Alphabet 2026 Second Quarter Earnings Highlights

Item 2026 Q2 Market Estimate Year-Ago Period Year-Over-Year Change Result

Revenue $1,198 billion $1,169.3 billion $964 billion +24% Beat expectations

Adjusted EPS $2.85 $2.89 - - Slightly below expectations

Google Search Revenue $633 billion $634 billion $542 billion +17% Slightly below expectations

Google Cloud Revenue $248 billion $224 billion $124 billion +82% Beat expectations

Capital Expenditure $449 billion $448 billion $224.5 billion +100% Slightly above expectations

AI Infrastructure Investment $449 billion - - - -

Net Income $1,121.1 billion - $463.2 billion +298% -

Investment Income $990.3 billion - $2.1 billion - -