Alphabet Stock Dips Despite Strong Q2 Revenue as Capex Forecast Soars

Google's parent company, Alphabet, announced better-than-expected revenue for the second quarter, fueled by an impressive 82% surge in its cloud business. However, the stock experienced a decline in extended trading following the company's upward revision of its capital expenditure forecast for 2026.

Key Financial Highlights:

• Adjusted Earnings Per Share (EPS): $2.85 (vs. $2.89 expected)
• Revenue: $119.80 billion (vs. $116.93 billion expected)

What You Need to Know:

• The company increased its projected capital expenditure (capex) for 2026 to a range of $195 billion to $205 billion, a significant jump from the previous forecast of $180 billion to $190 billion. This reflects substantial investment in artificial intelligence infrastructure to meet escalating demand.
• Google's AI coding tool, Antigravity, has achieved 2.4 million weekly active users.
• CEO Sundar Pichai highlighted the positive impact of the FIFA 2026 World Cup on Google's search performance.
• Alphabet's "other income," which includes stakes in companies like Anthropic and SpaceX, contributed $99 billion.
• Alphabet's capex for Q2 saw a 100% year-over-year increase, reaching $44.9 billion.
• Search revenue experienced a 17% growth, aligning with expectations.
• Google Cloud revenue soared by 82% year-over-year to $24.8 billion.

Finance chief Anat Ashkenazi emphasized the ongoing supply constraints in the AI infrastructure market, stating, "We're still in a supply-constrained environment... and we are seeing very strong demand both from external cloud customers as well as across the business."

In the competitive AI landscape, Google's Gemini App has garnered 950 million monthly active users and can process 22 billion tokens per minute. The company is also navigating pressure from Chinese open-weight AI tools and has recently launched cheaper Gemini models while reportedly refining its Gemini 3.5 Pro model.

CEO Sundar Pichai indicated that Gemini 4 is a "very ambitious effort" and that the company is investing heavily to compete at the frontier of AI development.

Inside the Earnings Call:

Waymo's Global Ambitions

Alphabet executives are expected to provide an update on Waymo, the company's autonomous vehicle venture. Waymo is reportedly aiming for international expansion this year, building on its significant presence in the U.S. market, where it has registered more robotaxis in Texas than Tesla and Amazon-owned Zoox combined.

AI Model Competition and Gemini 4

Pichai discussed the intense competition in AI, referring to Gemini 4 as a "very ambitious effort" and confirming that the company is dedicating substantial compute power to its development. Google plans to release new AI models monthly.

Massive Capex Hike for AI

Google has significantly increased its 2026 capital expenditure forecast to between $195 billion and $205 billion, driven by the relentless demand for AI infrastructure. Finance chief Anat Ashkenazi cited the need to "accelerate the delivery of capacity to meet growing demand" and noted the persistent supply constraints.

Leveraging Third-Party Cloud Capacity

To address the surging demand and supply constraints, Alphabet plans to increase its use of third-party cloud providers in Q3. This strategy, while potentially causing near-term margin pressure, is seen as crucial for continued growth and capturing value. This move has led to stock price increases for cloud providers like CoreWeave and Nebius.

Search Performance Outlook

While Google's search revenue grew 17% in Q2, finance chief Anat Ashkenazi cautioned about potentially tougher year-over-year comparisons in the third quarter due to lapping an acceleration in performance from the previous year.

AI Infrastructure Dominates Capex

The majority of Alphabet's $44.9 billion in Q2 capital expenditures was allocated to technical infrastructure supporting its AI buildout, with servers accounting for 60% and data centers/networking equipment for 40% of these investments.

Coding Tool Growth

Alphabet CEO Sundar Pichai highlighted the strong adoption of Google's AI coding tool, Antigravity, which now boasts over 2.4 million weekly active users. This comes amidst a growing competitive landscape, including OpenAI's Codex.

Advertising Tools Showing Promise

Google's AI-powered advertising tools, such as Performance Max and AI Max, are demonstrating positive results, with customers reportedly seeing a 50% increase in conversions on average for search campaigns.

Analyst Reactions

Analysts like Gene Munster of Deepwater Asset Management suggested that despite the strong cloud numbers, potential misses in search and operating margins might have muted investor enthusiasm. However, Munster expressed optimism for future stock performance.

World Cup Search Surge

The recent FIFA World Cup generated record search queries for Google, with CEO Sundar Pichai noting the platform's importance during significant global events. YouTube also saw substantial viewership during the tournament.

Other Bets and YouTube Performance

Alphabet's "other bets" category, including Waymo and Verily, saw a 2% increase in sales. YouTube advertising revenue experienced a 13% jump, reaching approximately $11.06 billion.

Significant Gain on Equity Securities

A substantial portion of Alphabet's profit increase was driven by a $99 billion gain on equity securities, primarily from investments in Anthropic and SpaceX, despite some fluctuations in SpaceX's valuation.

Gemini Model Enhancements

Google is actively enhancing its Gemini AI models, with Gemini 4 being a key focus for competing at the frontier of AI. The company is also releasing more cost-effective Gemini models to cater to a wider range of customer needs.

AI Talent Dynamics

The earnings report follows notable departures of key AI talent from Google to competitors like OpenAI and Anthropic, reflecting the intense competition for AI expertise.

Investment Income Boost

Alphabet's investment income is expected to be boosted by its significant stake in Anthropic, which has seen a considerable increase in valuation. The company also holds a stake in SpaceX.

Google's Cloud Growth Trajectory

Google Cloud continues to exhibit strong growth, outpacing rivals like Amazon Web Services and Microsoft Azure in terms of percentage growth. The company's investment in AI infrastructure and the acquisition of Wiz are contributing factors.

Focus on AI Spending

Wall Street remains highly focused on Alphabet's substantial investments in AI infrastructure, with capital expenditures expected to remain at high levels in the coming years, projecting significant increases beyond 2026.