Original | Odaily Planet Daily (@OdailyChina)

Author｜Azuma (@azuma_eth)

On the morning of July 22, Beijing time, Alphabet, Google's parent company, announced its second quarter financial report for 2026 after U.S. stock market hours.

If we look solely at the performance numbers, this is nearly a perfect report card. In Q2, Alphabet achieved revenue of $119.8 billion, a 24% increase year-over-year, and an operating profit of $40.8 billion, a 30% year-over-year increase — the company has maintained double-digit revenue growth for 12 consecutive quarters, and its core business continues to showcase strong growth resilience.

• Odaily Note: As shown in the table above, many investors noted Google’s explosive EPS (earnings per share) of $9.11 for the quarter, emphasizing that this figure is far higher than last year's $2.31, but this is mainly due to the valuation increase from a 14% stake in Anthropic; if the related earnings are excluded, the EPS would only be $2.85, below market expectations of $2.95.

Among them, the most market-concerning Google Cloud handed in a report that exceeded expectations. Last quarter, Google's cloud business revenue reached $24.77 billion, a year-over-year increase of 82%, making it Alphabet's fastest-growing business segment.

At the same time, Google's traditional core remains solid, with Google Services revenue at $94.54 billion, a year-over-year increase of 15%, of which search and other business revenues were $63.27 billion, up 17% year-over-year, and YouTube ad revenue was $11.06 billion, a 13% increase year-over-year.

From revenue, profit to AI business progress, Google has nearly delivered the answers all investors are eager to see; however, interestingly, after the financial report was released, Alphabet's stock price did not rise, but instead fell nearly 3% in after-hours trading.

Why is the market not buying it? The reason is easy to understand — compared to "how much money Google made," the market is now more focused on the question "what cost must Google pay to win in the AI era?"

Capex surges to $200 billion, free cash flow turns negative for the first time

Over the past few years, due to continuously profiting from its search, advertising, and other businesses, Google has been one of the companies with the most abundant cash flow among global tech giants, but as AI competition heats up, this model is rapidly changing.

To seize the lead in AI infrastructure, Alphabet is continuously increasing its investments. In Q2, Alphabet's capital expenditure reached $44.9 billion (exceeding market expectations of $44.2 billion) and raised its full-year capital expenditure guidance for 2026 from the previous $180 billion - $190 billion, to $195 billion - $205 billion.

In terms of expenditure categories, most of the funds will be used for building AI infrastructure such as servers, data centers, and network equipment. This means that just this year alone, Google may invest nearly $200 billion in betting on AI.

The massive investment has put new pressure on Google. In Q2, due to the rapid growth of capital expenditure, Alphabet's free cash flow turned negative for the first time — the company's cash flow from operating activities was $39.1 billion, while capital expenditure reached $44.9 billion, leading to a final free cash flow of -$5.855 billion.

At the investor conference call after the financial report was released, Alphabet CFO Anat Ashkenazi acknowledged the cash flow issue, stating: "Investment in AI infrastructure will continue to put pressure on the income statement and cash flow."

In addition, it is worth noting that to support this ongoing expansion of AI infrastructure, Google has begun to significantly incur debt. In June of this year, Alphabet completed a stock and convertible preferred stock offering, raising approximately $49.6 billion in net capital, and the company also issued $20.3 billion in senior unsecured bonds to meet capital demands.

For a company that has long relied on cash flow advantages to win investor favor, this is undoubtedly a significant change. Of course, the market is not opposed to Google's continued investment in AI; the real question is: "How long will these investments take to transform into a new growth curve?"

Google Cloud performs well, but it's not enough

Fortunately, the revenue performance of Google Cloud in the Q2 financial report can alleviate some of the investors' anxiety.

Training models and deploying AI applications require a large amount of computing power, and cloud services are the key entry point that connects AI capabilities with business clients. In Q2, Google's Google Cloud revenue reached $24.77 billion, an 82% year-over-year increase, not only far exceeding market expectations but also achieving the fastest growth rate in recent years.

More importantly, the core driving force behind the cloud business growth has gradually shifted from traditional cloud computing demand to AI infrastructure and enterprise-level AI solutions. Alphabet stated in its financial report that the growth of Google Cloud this quarter primarily came from demand for enterprise AI infrastructure, Google Cloud Platform (GCP) AI solutions, and core cloud service growth.

At the same time, Google Cloud's order reserves continue to expand. As of the end of Q2, Google Cloud's remaining performance obligations (RPO) reached $514 billion, further increasing from the previous quarter. Among them, more than half are expected to recognize revenue within the next 24 months — at least from the current perspective, Google’s investment in AI infrastructure is not just about chasing the technology race; it has already begun to translate into actual business growth.

Compared to other AI giants, Google's biggest advantage is its more complete industrial chain, from the Gemini model, to self-developed TPU chips, to the Google Cloud platform, Google can cover multiple links of AI infrastructure.

The current rapid growth trend of Google Cloud also serves as a phased report on the return on investment in AI... but this is still far from enough; after all, while Google Cloud's annualized revenue has reached about $100 billion, Alphabet's annual capital expenditure has surged to $200 billion.

As investment in AI infrastructure continues to expand, whether future revenue growth can maintain sufficient speed to ultimately cover this capital input remains unanswered; from the after-hours drop, it seems that the market holds a more cautious attitude toward this.

Is Gemini's intelligence the biggest concern?

If Google Cloud proves that Google has the ability to gain commercial benefits from the AI wave, then Gemini determines whether Google can maintain its lead in this long-term competition.

Over the past few years, Google has emphasized its "full-stack AI" strategy. From the underlying TPU chips, data centers, to the Gemini model, and then to the Google Cloud platform, Google attempts to establish a complete system covering AI infrastructure and application ecology.

From the data disclosed in the financial report, Gemini's user base is also growing rapidly. Currently, the monthly active users of the Gemini App have reached 950 million; the Gemini model API processes about 22 billion tokens per minute; meanwhile, nearly 90% of Fortune 100 companies are using Gemini Enterprise.

These data prove that Google has not missed the commercialization wave of AI, but at the same time, concerns about Gemini in the market still exist.

The reason is that the core of AI competition is not only the number of users and the scale of infrastructure; the capabilities of the models also determine the attractiveness of the ecosystem. Previously, the delay in releasing the planned Gemini 3.5 Pro raised market concerns about its model competitiveness, especially in high-value application scenarios such as AI programming and intelligent agents, where competitors like Anthropic and OpenAI are rapidly iterating, and Gemini seems to show clear signs of falling behind.

For Google, the most important question now is whether Gemini can prove itself to still be in the top tier?

In the past, Google's greatest advantages were having a leading global search entry point, strong engineering capabilities, and vast data resources, but the competitive rules of the AI era are changing. User habits may shift from traditional search to AI assistants, and developers may prioritize choosing stronger model ecosystems. If Gemini cannot prove itself, then even if Google has the most comprehensive infrastructure, it may face the risk of its application value being intercepted by other models.

AI competition shifts to focus on "value realization"

Looking back, Alphabet's financial report presents a very distinct duality.

On one hand, Google is proving that AI investment is not just a fantasy for the capital market; the rapid growth of Google Cloud, the continuous increase in demand for AI infrastructure, and the expansion of Gemini's user base all indicate that AI is gradually shifting from a technical wave to real commercial demand; but on the other hand, the market's caution is not without reason, with nearly $200 billion in annual capital expenditure, the first negative free cash flow, and extremely high competitive pressure on model performance all signify that Google needs to prove to investors — that this AI gamble will ultimately bring long-term returns that exceed the input costs.

The challenges Google faces are, in fact, questions that the entire AI industry is grappling with. Over the past few years, tech giants such as Microsoft, Amazon, and Meta have also continuously expanded their investments in AI infrastructure, and data centers, computing power, and chip procurement have already become the main battleground for giants' competition.

In the future, the focus of the market may not be on who invests the most, but on who can more quickly convert capital investments into commercial value. For Google and other giants, the AI competition may have just entered a critical stage.

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