Authors: Yang Chen, Long Yue
Alphabet, Google's parent company, released its second-quarter results, with cloud revenue significantly exceeding Wall Street expectations, and cloud backlog surpassing the $500 billion mark for the first time.However, market focus quickly shifted to another aspect: this marks the first time Google's free cash flow has turned negative in decades since its IPO. Simultaneously, the company raised its full-year capital expenditure guidance for the second time this year, abruptly intensifying investor concerns over whether the massive AI bet can deliver corresponding returns.
For the second quarter ended June 30, Alphabet reported revenue of $119.796 billion, a 24% year-over-year increase; growth was 23% on a constant currency basis, marking the 12th consecutive quarter of double-digit revenue growth. Operating profit rose 30% to $40.77 billion, with the operating margin improving by 2 percentage points to 34%.
Among these,Google Cloud revenue reached $24.768 billion, surpassing market expectations of $22.46 billion, soaring 82% year-over-year, marking the fastest growth rate in recent years, indicating that AI investments are consistently translating into commercial returns. Search advertising revenue was $63.27 billion, slightly below the market expectation of $63.28 billion.
Alphabet holds stakes in several companies including Anthropic and SpaceX. Influenced by a significant increase in unrealized gains on equity securities,investment income for the quarter approached $100 billion, driving net income attributable to common stockholders to $112.107 billion, a 298% year-over-year increase.
Following the earnings release, Google's stock price experienced minor fluctuations. During the earnings call, Google raised its full-year capital expenditure guidance to a range between $195 billion and $205 billion, up from the previous estimate of $180 billion to $190 billion. After the announcement, market concerns over whether massive capital expenditures can yield corresponding returns led Google's stock to drop by 4.2%.
Free Cash Flow Turns Negative for First Time, Capital Expenditure Raised Again
Alphabet's second-quarter capital expenditures reached $44.924 billion, significantly higher than $22.446 billion in the same period last year,directly causing the quarter's free cash flow to turn negative at -$5.855 billion (approximately -$5.9 billion) — the first time Google has reported negative quarterly free cash flow in decades since its IPO.
Free cash flow is a measure of the cash available for debt repayment or shareholder returns after covering operational costs and capital expenditures, and has long been a core metric used by Wall Street to assess the financial health of technology companies.
During the earnings call, Chief Financial Officer Anat Ashkenazi announced thatthe full-year 2026 capital expenditure guidance is being raised to $195 billion-$205 billion, higher than the previous expectation of $180 billion-$190 billion, and also exceeding analysts' previous prediction of approximately $186 billion. This marks Google's second upward revision of its capital expenditure guidance this year — in April of this year, the forecast had already been raised from previous levels to a maximum of $190 billion.
Ashkenazi stated: "We expect free cash flow to remain under pressure, driven by our investments in technical infrastructure, which enable us to seize AI opportunities and continue to deliver substantial returns."
However, the stock price fell following the announcement. Investors' concern lies in: Google is rapidly transitioning from a light-asset company to a capital-intensive one. To support massive AI infrastructure investments, Alphabet recently raised nearly $100 billion in debt and completed its first stock issuance in over twenty years since its IPO in June, netting approximately $85 billion — a stark reversal from the strategy of continuous stock buybacks pursued for many prior years.
Investing.com senior analyst Thomas Monteiro stated bluntly: "The upward revision in capital expenditure is unfavorable for Alphabet. Combined with a rising interest rate environment and ongoing tight supply and demand for AI infrastructure, the logic of 'self-sustenance through operating cash flow' is beginning to falter."
However, Dec Mullarkey, Managing Director at asset management firm SLC Management, holds a relatively optimistic view: "The market wants to see hyperscale cloud vendors fiercely competing for AI leadership, but not at the expense of eroding profitability. Alphabet is still maintaining that balance for now."
Ashkenazi added that the company will utilize a combination of operating cash flow, debt, and equity financing to support expenditures. She explicitly stated that there would be no further stock issuance beyond the announced scope, while emphasizing the maintenance of a robust balance sheet.
Google Cloud Becomes the Largest 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-over-year increase, accelerating further from previous rates. The company stated that growth primarily stemmed from sustained demand for Google Cloud Platform (GCP) enterprise AI solutions, enterprise AI infrastructure, and core cloud services. Concurrently, Google Cloud's operating profit reached $8.814 billion, a significant improvement from $2.826 billion in the same period last year, indicating markedly enhanced profitability.
The cloud business backlog (contracted but not yet recognized revenue) increased to $514 billion, up from approximately $460 billion last quarter, exceeding $500 billion for the first time. The company stated that over half of this is expected to be recognized as revenue within the next 24 months, with the customer base encompassing a "broad mix of customers."
Monteiro noted that the cloud business's outperformance at least clearly indicates that the company's AI investments are "translating into rapidly growing, profitable revenue, with contracts being fulfilled immediately upon capacity completion."
Although Google Cloud still trails Amazon AWS and Microsoft Azure, driven by strong demand for AI infrastructure from AI startups and enterprise customers, it has become one of Alphabet's fastest-growing businesses.
In contrast, the traditional advertising business continued steady growth:
- Google Search and other revenue was $63.271 billion, a 17% year-over-year increase;
- YouTube ads revenue was $11.055 billion, a 13% year-over-year increase; regarding YouTube monthly unique users, during the 2026 FIFA World Cup, over 1.7 billion unique users watched related videos on the platform, further driving traffic growth;
- Google subscriptions, platforms, and devices revenue was $12.911 billion, a 15% year-over-year increase.
Overall, Google Services revenue reached $94.54 billion, a 15% year-over-year increase.
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're at the very early stages of long-term structural shifts across multiple domains... Over the past year, we have grown increasingly optimistic about future opportunities."
He revealed that nearly 90% of Fortune 100 companies are now using Gemini Enterprise; Gemini models process 220 billion API tokens per minute, and the Gemini App monthly active users have reached 950 million. Nate Elliott, Chief Analyst at eMarketer, pointed out: "Gemini is just one step away from becoming Google's third consumer AI product with a billion users (joining AI Overviews and AI Mode)."
Regarding the model roadmap, Pichai shifted focus to the next-generation flagship model, Gemini 4, describing it as a 'larger-scale next-generation frontier model.' He stated that the company is prioritizing its training by concentrating computing power and indicated that Google's model release pace will accelerate. The delayed release of Gemini 3.5 Pro had previously raised external doubts about Google's competitiveness in areas like AI programming, where Anthropic and OpenAI have gained significant advantages among developer communities.
Simultaneously, AI features continue to drive growth in Google search query volume, demand for the company's cybersecurity products remains robust, and the newly launched Gemini 3.5 Flash Cyber shows outstanding cost efficiency. Additionally, during the 2026 FIFA World Cup, over 1.7 billion unique users watched related videos on YouTube, further driving platform traffic growth.
Pichai stated that the company's "differentiated, full-stack AI strategy" is continuously creating quantifiable commercial value for consumers, enterprise customers, and partners.
Continued Investment in AI Infrastructure
To meet the growing demand for AI computing power, Alphabet intensified its financing efforts in the second quarter.
In June, the company completed the issuance of Class A shares, Class C shares, and mandatory convertible preferred shares, netting $49.6 billion; concurrently, it issued $20.3 billion in senior unsecured bonds; additionally, it established an at-the-market (ATM) equity offering program for up to $40 billion, which had not been initiated as of the end of the second quarter. These measures have brought Alphabet's recent cumulative debt raising close to $100 billion.
Due to the substantial increase in capital expenditures, free cash flow for the quarter turned negative at -$5.855 billion, but free cash flow over the past 12 months remained at $53.273 billion. Meanwhile, the combined capital expenditures of the four hyperscale cloud providers (Google, Meta, Microsoft, Amazon) in 2026 are projected to exceed $725 billion, with the entire technology industry's free cash flow having fallen to a decade-low level.
Overall, this earnings report presents a distinct 'dual nature': the explosive growth of the cloud business and the backlog exceeding $500 billion confirm that AI investments are beginning to yield commercial returns; however, the first-ever negative free cash flow and the second upward revision of capital expenditure guidance this year have kept the market highly vigilant regarding the sustainability of this AI arms race. Whether Google can continue to walk the tightrope between competing for AI leadership and maintaining financial health will be the core proposition most closely watched by investors over the coming quarters.
