Is Alphabet Spending Too Much on AI? Wall Street Sees Opportunities and Risks After Earnings: Cloud Numbers Are Key

According to Benzinga, Alphabet (GOOGL-US) triggered a divided reaction on Wall Street after releasing its second-quarter earnings. Investors welcomed the cloud business growth that exceeded expectations, while expressing concerns over rising AI-related expenditures and pressure on free cash flow.

Gary Black, an investor at The Future Fund LLC, noted that the Google parent company raised its full-year 2026 capital expenditure guidance to $195 billion to $205 billion, a move that could 'trigger a new capital expenditure arms race' as major tech firms compete to expand AI infrastructure.

Black said the higher spending reflects Google's efforts to scale up AI computing capacity to meet growing cloud demand, but the resulting negative free cash flow is intensifying investor unease.

Dan Ives, former Wedbush analyst and founder of the newly established investment bank Yorkville Ives, said that capital spending by hyperscale cloud providers will remain the 'focus of attention' for tech investors over the next 12 to 18 months.

Ives stated on CNBC that Google Cloud has become a 'blueprint' for enterprise AI adoption, and its performance has 'set the tone' for upcoming earnings reports from Microsoft (MSFT-US), Amazon (AMZN-US), and Meta Platforms (META-US).

Cloud growth overshadows search business missing expectations

Gene Munster of Deepwater Asset Management said Wall Street is overly focused on the slight miss in search revenue growth and operating margin, calling Google Cloud's 82% year-over-year growth 'the most important number in the report.'

Munster wrote on X: 'The cloud data is the most important number, and it significantly exceeded expectations.' He added that 'the stock should be up tomorrow' based on the results.

Google Cloud grew 82% year-over-year, far surpassing the market expectation of 63%, yet the stock remained flat due to slightly weaker-than-expected search revenue and margin.

Search revenue: Expected to grow 17.1%, actual growth was 16.8%.

Operating margin: Actual was 34.0%, compared to an expected 34.5%.

Investors see more evidence that AI is already delivering returns

Shay Boloor, strategist at Future Equities, said Alphabet is providing 'one of the clearest answers to date' to the question of whether hyperscale cloud providers are building profitable AI businesses.

Boloor said: 'GOOGL is giving one of the clearest answers yet to whether hyperscalers are building profitable AI businesses or just spending massive amounts to defend market share.'

He added that Google's $514 billion cloud backlog and rising customer consumption indicate that 'demand has translated into extraordinary fundamentals.'

Google's cloud backlog exceeded $500 billion, reaching $514 billion.

Management also said existing customers are consuming more than 50% above their initial commitments, and new customer acquisition has more than doubled year-over-year.

CNBC's Jim Cramer called Google Cloud 'excellent' on his show Mad Money, but noted that investors are focusing on the company's nearly $6 billion negative free cash flow after the earnings release.

Profits beat Wall Street expectations

According to Benzinga Pro data, Alphabet's Q2 revenue was $119.8 billion, exceeding analysts' expectation of $116.82 billion.

Its Q2 earnings per share (EPS) were $9.11, significantly higher than the expected $2.87.

Alphabet's Class A shares closed down 1.46% on Wednesday at $342.09; after-hours trading saw another 3.31% decline. The company's Class C shares closed down 1.24% at $341.91, with after-hours trading down 2.92%.

Benzinga Edge rankings show GOOG's momentum score at the 87th percentile and growth score at the 89th percentile.