Authors: Yang Chen, Long Yue

Google's parent company Alphabet announced its second-quarter results, with cloud business revenue significantly exceeding Wall Street expectations, and cloud backlog orders surpassing $500 billion for the first time. However, the market quickly turned its focus to another aspect: this is the first time in decades of Google's public listing that free cash flow has turned negative, and the company has raised its full-year capital expenditure guidance for the second time this year, leading to heightened concerns among investors about whether substantial bets on AI can yield corresponding returns.

For the second quarter ended June 30, Alphabet achieved revenue of $119.796 billion, a year-on-year increase of 24%; calculated at fixed exchange rates, the growth was 23%, achieving double-digit revenue growth for the 12th consecutive quarter. Operating profit grew by 30% year-on-year to $40.77 billion, with an operating margin increase of 2 percentage points to 34%.

Among them, Google Cloud revenue reached $24.768 billion, exceeding market expectations of $22.46 billion, and soaring 82% year-on-year, marking the fastest growth rate in recent years, showing that AI investments are continuously translating into business returns. Search advertising revenue was $63.27 billion, slightly below market expectations of $63.28 billion.

Alphabet holds stakes in several companies including Anthropic and SpaceX, and due to a significant increase in unrealized gains from equity securities, the quarterly investment income approached $100 billion, driving net profit attributable to common shareholders up 298% year-on-year to $112.107 billion.

After the earnings report was released, Google’s stock price fluctuated slightly. During the earnings call, Google raised its full-year capital expenditure guidance to between $195 billion and $205 billion, up from the previous expectation of $180 billion to $190 billion. Following the announcement, market concerns grew regarding whether the massive capital expenditures would yield corresponding returns, leading to a 4.2% drop in Google’s stock.

Free Cash Flow Turns Negative for the First Time, Capital Expenditure Raised Again

In the second quarter, Alphabet's capital expenditure reached $44.924 billion, far exceeding $22.446 billion in the same period last year, directly resulting in a free cash flow for the quarter of -$5.855 billion (approximately -$5.9 billion) — the first time in decades that Google has reported a negative quarterly free cash flow.

Free cash flow is a measure of the cash available for debt repayment or shareholder returns after covering operating costs and capital expenditures, historically serving as a core metric for Wall Street in evaluating the financial health of tech companies.

During the earnings call, Chief Financial Officer Anat Ashkenazi announced that the full-year capital expenditure guidance for 2026 was raised to $195 billion to $205 billion, higher than the previous expectations of $180 billion to $190 billion, and exceeding analysts’ prior forecast of approximately $186 billion. This is the second time Google has raised its capital expenditure guidance this year — in April, it was already raised to a maximum of $190 billion from the previous levels.

Ashkenazi stated, “We expect free cash flow to remain under pressure, driven by our investments in technology infrastructure, which enable us to seize AI opportunities and continue to deliver substantial returns.”

However, after the announcement, the stock price fell in response. Investors' concerns center on the fact that Google is rapidly transforming from a light-asset enterprise into a capital-intensive company. To support its enormous investments in AI infrastructure, Alphabet recently took on nearly $100 billion in debt and completed its first stock issuance in over twenty years in June, raising approximately $85 billion — a stark reversal from its previous strategy of continuously repurchasing stocks for many years.

Investing.com senior analyst Thomas Monteiro bluntly stated, “The renewed increase in capital expenditure is not beneficial for Alphabet. Coupled with a rising interest rate environment and continued tight supply and demand for AI infrastructure, the logic of 'relying on operating cash flow for self-sustenance' is beginning to wane.”

However, Dec Mullarkey, Managing Director of asset management firm SLC Management, holds a relatively optimistic view: “The market hopes to see super-scale cloud vendors striving for AI leadership, but not at the expense of eroding profits. Currently, Alphabet is still maintaining this balance.”

Ashkenazi added that the company will comprehensively utilize operating cash flow, debt, and equity financing to support expenditures and explicitly stated that there will be no further stock issuance beyond the announced scope, while emphasizing that it will maintain a robust balance sheet.

Google Cloud Becomes the Biggest Growth Engine

By business segment, Google Cloud continues to be Alphabet's fastest-growing business.

In the second quarter, Google Cloud revenue reached $24.768 billion, an 82% year-on-year increase, further accelerating from previous figures. The company noted that growth primarily stems from Google Cloud Platform (GCP) enterprise AI solutions, enterprise AI infrastructure, and continued demand for core cloud services. Meanwhile, Google Cloud's operating profit reached $8.814 billion, significantly up from $2.826 billion in the same period last year, showing enhanced profitability.

The cloud business backlog (the amount of contracted but unrecognized revenue) rose to $514 billion, further expanding from about $460 billion in the previous quarter and breaking the $500 billion mark for the first time. The company indicated that more than half is expected to be recognized as revenue within the next 24 months, serving a “broad mix of customers.”

Monteiro stated that the better-than-expected performance of the cloud business clearly indicates that the company's AI investment is “translating into fast-growing profitable revenue, with related contracts immediately landing after capacity is built.”

Although Google Cloud still lags behind Amazon AWS and Microsoft Azure, it has become one of Alphabet's fastest-growing businesses due to strong demand for AI infrastructure from AI startups and enterprise customers.

In contrast, traditional advertising business remains robust:

• Google Search and other business revenue was $63.271 billion, a year-on-year increase of 17%;
• YouTube ad revenue was $11.055 billion, a year-on-year increase of 13%; during the 2026 World Cup, over 1.7 billion unique users watched related videos through the platform, further driving traffic growth;
• Google subscription, platform, and device business revenue was $12.911 billion, a year-on-year increase of 15%.

Overall, Google Services revenue reached $94.54 billion, a year-on-year increase of 15%.

CEO: AI Investment is Reshaping All of Google, Focus on Gemini 4

Alphabet CEO Sundar Pichai stated that the company's AI investment is redefining the entire business. He told investors: “It feels like we are at the very early stage of a long-term structural shift across multiple domains… In the past year, we have become increasingly optimistic about future opportunities.”

He revealed that nearly 90% of the Fortune 100 companies currently use Gemini Enterprise; the Gemini model processes 22 billion API tokens per minute, and monthly active users of the Gemini App reached 950 million. eMarketer chief analyst Nate Elliott pointed out: “Gemini is just one step away from becoming Google's third consumer AI product to reach one billion users (alongside AI Overviews and AI Mode).”

Regarding the model roadmap, Pichai shifted focus to the next-generation flagship model Gemini 4, calling it “the larger next-generation frontier model,” which is currently prioritizing computational power for training and stated that the pace of Google model releases will accelerate. The previous delay in the release of Gemini 3.5 Pro had raised external doubts about Google's competitiveness in areas such as AI programming; Anthropic and OpenAI have gained significant advantages in the developer community.

Meanwhile, AI capabilities continue to drive increases in Google search query volumes, and demand for the company’s cybersecurity products remains strong; the newly launched Gemini 3.5 Flash Cyber has shown outstanding performance in cost efficiency. Additionally, during the 2026 World Cup, over 1.7 billion unique users watched related videos on YouTube, further boosting platform traffic growth.

Pichai stated that the company’s “differentiated full-stack AI strategy” continues to create measurable commercial value for consumers, enterprise customers, and partners.

Ongoing Investment in AI Infrastructure

To meet the growing demand for AI computing power, Alphabet further strengthened its financing in the second quarter.

In June, the company completed the issuance of Class A stocks, Class C stocks, and mandatory convertible preferred stocks, raising a net amount of $49.6 billion; at the same time, $20.3 billion of senior unsecured debt bonds were issued; another $40 billion ATM stock issuance plan was established, but has not yet been initiated as of the end of the second quarter. The above actions have brought Alphabet’s total debt accumulation close to $100 billion recently.

Due to the substantial increase in capital expenditure, the quarterly free cash flow turned negative at -$5.855 billion, but over the past 12 months, free cash flow still reached $53.273 billion. Meanwhile, the combined capital expenditures of the four largest cloud vendors (Google, Meta, Microsoft, Amazon) are expected to exceed $725 billion in 2026, and the overall tech industry’s free cash flow has fallen to a ten-year low.

Overall, this earnings report presents a distinct "duality": explosive growth in the cloud business and backlog orders over $500 billion affirm that AI investments are beginning to deliver business returns; however, the first negative turn in free cash flow and the second upward adjustment of capital expenditures this year heightens market vigilance regarding the sustainability of this AI arms race. Whether Google can continue to walk the tightrope between vying for AI leadership and maintaining financial health will be the core question of greatest concern for investors in the coming quarters.