Written by: Rita

Trend Guide

Google's second-quarter financial results reveal two core themes: the accelerated realization of AI commercialization, while capital expenditure expectations have been revised upward again.

Cloud business revenue increased by 82% year-on-year, search business revenue grew by 17% year-on-year, and TPU contributed over $1 billion in revenue in a single quarter for the first time. The AI driving force has permeated all of Google's business lines. The company has revised the capital expenditure guidance for 2026 from the range of $180 billion to $190 billion up to the range of $195 billion to $205 billion, and indicated that capital expenditure for 2027 will continue to grow significantly. JPMorgan predicts that capital expenditure in 2027 will reach $378 billion, an 85% year-on-year increase.

JPMorgan maintains an overweight rating on Google, with a target price of $420, corresponding to a 25 times price-to-earnings ratio based on a GAAP earnings per share of $16.66 for 2028, and recommends buying on dips. The institution believes that AI investment has entered a return realization period, and the upward revision of capital expenditures is demand-driven, while the pressure on profit margins is a temporary phenomenon. If the market experiences a sell-off due to concerns about the scale of capital expenditures, it will create a good opportunity for positioning.

Cloud business growth continues to exceed expectations; AI commercialization accelerates

In the second quarter, Google's cloud revenue reached $24.77 billion, a year-on-year increase of 82%, with growth momentum continuing to rise. The order backlog reached $514 billion at the end of the quarter, with an increase of $52 billion quarter-on-quarter, about 50% of which is expected to be confirmed as revenue over the next 24 months.

The number of new customers doubled year-on-year, and existing customer resource consumption exceeded committed usage by over 50%. The processing volume of the Gemini API increased from about 16 billion tokens per minute in the first quarter to 22 billion tokens per minute, a quarter-on-quarter growth of 37.5%. About 90% of Fortune 100 companies have adopted Gemini Enterprise, with over 9 million active developers monthly.

TPU business recognized revenue independently for the first time in the second quarter, and JPMorgan estimates single-quarter revenue exceeded $1 billion. Google adopted a direct sales model and non-licensed mode, with revenue recognized on a gross basis. Currently, most TPU orders have been included in the backlog, and delivery is expected to be concentrated in 2027, with TPU revenue continuing to be released in 2026.

Search business resilience exceeds expectations; AI drives incremental queries

Market concerns that AI would siphon off search traffic were countered by second-quarter data. Revenue from search and other businesses increased by 17% year-on-year, with retail, finance, technology, and other major verticals achieving positive contributions.

AI features surpassed 1 billion monthly active users, continuously contributing incremental search requests. AI optimization improved shopping ad relevance by 20%, with about 500,000 advertisers adopting AI Max tools, driving billions of new monetizable queries. YouTube advertising revenue grew by 13% year-on-year, driven by both brand and performance advertising, with contributions from FIFA World Cup-related promotions.

Capital expenditures revised upward again, driven by demand rather than cost pressures

The company revised its capital expenditure guidance for 2026 from the range of $180 billion to $190 billion up to the range of $195 billion to $205 billion, an increase of about $15 billion. JPMorgan pointed out that the upward revision is mainly due to the company's acceleration of computing power delivery to match strong demand, rather than rising upstream costs. Capital expenditure for 2027 will continue to grow significantly, with the bank's forecast revised up to $378 billion, an 85% year-on-year increase.

The market's concerns about the scale of capital expenditures are reasonable, but the structure of the funding sources needs attention. In the second quarter, the company completed approximately $20 billion in bond issuance and $85 billion in equity financing to support capital expenditures. Management stated that there are currently no plans to return to the equity market, and future financing will mainly rely on operating cash flow combined with incremental bond issuance, maintaining capital expenditures while keeping the balance sheet healthy.

Profit margins under short-term pressure, long-term recovery trend clear

In the second quarter, the operating profit margin was 34.0%, slightly lower than JPMorgan's expected 34.4%. The pressure on margins mainly stems from one-time and temporary factors: third-party computing power leasing to fill in-house capacity gaps; TPU hardware sales with hardware gross margins lower than software; Wiz integration expenses; accelerated depreciation and legal expenses, all of which are not structurally deteriorating. The bank expects that as in-house capabilities gradually take shape and TPU revenue scale effects become evident, margins will steadily recover.

Trend Perspective

The most critical signal from this financial report is that Google's AI investment has shifted from a "burning cash period" to a "revenue realization period." Cloud business growth has continuously risen, TPU has independently contributed revenue for the first time, and the search business has not only avoided AI diversion but instead accelerated growth, with multiple data points confirming that the pace of AI commercialization is faster than market expectations.

The market still tends to evaluate Google using the traditional framework of "capital expenditure and profit margins," but JPMorgan believes this analytical framework needs updating. The upward revision of capital expenditures is demand-driven, and customer demand for computing power is strong, necessitating faster delivery; pressure on profit margins is a temporary phenomenon, representing transitional costs rather than structural deterioration. If the market continues to price under the old framework, it may present positioning opportunities.

Google's financing strategy is also worth noting. The combination of $20 billion in bond issuance and $85 billion in equity financing in the second quarter not only reflects management's commitment to increasing capital expenditures but also indicates their unwillingness to overly burden the balance sheet. The scale of $85 billion in equity financing is relatively rare among tech giants, but JPMorgan judges this to be a one-time operation, and there will be no further equity financing in the future.

Disclaimer

This article is a整理与解读 of third-party broker research reports, specifically JPMorgan's report on July 23, 2026. The ratings, target prices, earnings forecasts, and related judgments quoted in the text are solely the opinions of the analysts of that brokerage and only represent the views of their respective institution, and do not represent the views of潮向研究, nor does it constitute any investment advice.

The market carries risks, and decisions should be made independently. This article should not be used as a basis for buying or selling any securities.