Written by: Tide Research

Google's financial report is clearly better than expected overall.

The focus, in my view, is not on how much net profit has grown, but rather two questions have been answered: first, AI has not yet destroyed the search business; second, Google’s investment in AI has started to translate into revenue through its cloud business.

Alphabet's revenue for the second quarter reached $119.8 billion, a year-on-year increase of 24%; operating profit was $40.8 billion, up 30% year-on-year, with the operating profit margin rising from 32% to 34%. This indicates that despite significantly increasing AI investments, Google’s main business has still maintained a decent profitability.

The search business has not been crushed by AI

Google's search revenue reached $63.3 billion, a year-on-year increase of 17%.

The primary concern previously was that AI products like ChatGPT and Perplexity would reduce users’ reliance on traditional search, thereby undermining Google’s core advertising business. However, currently, AI has not significantly diverted Google search traffic; rather, new features like AI summaries and AI formats have increased search usage.

This is very important for Google, as search advertising remains the company’s cash cow. As long as this part of the business does not experience a significant decline, Google has enough cash to continue investing in AI.

YouTube advertising revenue was $11.1 billion, a year-on-year increase of 13%, showing a relatively stable performance. The overall revenue for Google Services was $94.5 billion, up 15% year-on-year.

The cloud business truly exceeded expectations

The standout of this quarter was Google Cloud.

Cloud business revenue was $24.8 billion, a year-on-year increase of 82%; operating profit rose from $2.8 billion in the same period last year to $8.8 billion. Thus, the operating profit margin for the cloud business has increased from about 21% to about 36%.

This means that Google Cloud is not just “growing rapidly in revenue,” but is also starting to contribute considerable profits.

The primary reason behind this is the rapidly growing demand from enterprises for AI computing power, models, and data services.

Gemini Enterprise has covered nearly 90% of the Fortune 100 companies, with Gemini applications boasting 950 million monthly active users, and Google’s model interface processing about 22 billion tokens per minute.

In other words, Google's AI narrative is transitioning from “product launch” to “enterprise payment” phase, and at least from the cloud business perspective, AI has begun to generate real profits.

Net profit has nearly tripled, but don’t be misled by this number

Alphabet’s net profit for this quarter reached $112.1 billion, a year-on-year increase of 298%, with earnings per share reaching $9.11.

This number looks very exaggerated, but it includes about $98 billion in equity investment gains, primarily from the appreciation in the valuation of securities, not from the actual operating profits of search, YouTube, and cloud businesses.

Therefore, to assess Google’s true operating performance for this quarter, it is necessary to look at the operating profit of $40.8 billion, rather than the net profit of $112.1 billion.

The operating profit grew 30% year-on-year, which is quite good, but it is not as astonishing as the net profit figure appears to be.

AI is simply too costly

Google’s capital expenditures for the second quarter reached $44.9 billion, nearly double that of the same period last year, even exceeding the operating cash flow of $39.1 billion for the season, resulting in a free cash flow of negative $5.9 billion.

The company has also raised its full-year capital expenditure forecast for 2026 from $180 billion to $190 billion, up to $195 billion to $205 billion, and it is expected that capital expenditures will continue to increase significantly in 2027.

This funding is primarily used for AI servers, TPUs, data centers, power, and network facilities.

Google even raised a substantial amount of funds in the second quarter by issuing common stocks, preferred stocks, and bonds. This indicates strong demand for AI, but also signifies that this competition has turned into an extremely costly infrastructure war.

Now the market’s concern is no longer whether “Google has AI,” but rather with Google investing $200 billion in building AI infrastructure, how much stable profit can it generate in the future?

If the cloud business continues to maintain high growth and profit margins stay at elevated levels, these investments could be seen as building the next generation of cash cows in advance; however, if AI price competition intensifies, model costs decline rapidly, or client demand falls short of expectations, these data centers could become a heavy depreciation burden.

In summary, this is a financial report with strong business fundamentals that presents caution regarding cash flow.

The positives are clear:

• Search advertising remains strong and has not yet been disrupted by AI;
• Google Cloud's revenue and profits are both surging;
• Gemini's user scale and enterprise adoption rate are rapidly increasing;
• The overall operating profit margin for the company is still rising.

The risks are equally clear:

• Net profit is significantly amplified by one-time investment gains;
• AI capital expenditures have already surpassed operating cash flow;
• Future pressures from depreciation, financing, and equity dilution are likely to increase;
• The market needs to see sustained growth in AI revenue to justify the massive investments.

Google has already proven it has not fallen behind in the AI competition and has even started to earn real money through its cloud business; what remains to be proven is whether the earned money can cover the increasingly large AI investments.

As such, this financial report is generally favorable for Google's long-term logic, but the short-term stock price may not simply rise. The market will weigh between "cloud business growth of 82%" and "full-year capital expenditures exceeding $200 billion," but it is a positive for the entire U.S. stock market and even the Korean and A-share markets, after all, investors are willing to spend more money, allowing upstream companies to earn more significantly.

Let the music play on, let the dance continue.