Alphabet's second-quarter results brought record Google Search revenue and an 82% jump in Google Cloud sales, yet the stock fell around 7% after the release. The trigger was a raised 2026 capital expenditures forecast of $195 billion to $205 billion, up from a previous range of $180 billion to $190 billion.
Alphabet stock fell by around 7% immediately after the company released its second-quarter operating results, which came out after the market closed on Wednesday. Artificial intelligence fueled strong revenue growth in Google Search and Google Cloud, but Alphabet also said it plans to spend even more on AI data centers during 2026 than originally expected, which made investors uneasy.
Management said capex was on track to come in somewhere between $195 billion and $205 billion during 2026, revised higher from $180 billion to $190 billion in its previous update. That forecast follows $91 billion in spending last year. Shares are now down 20% from their recent all-time high.
Search and Cloud both grew on AI demand
Google Search generated a record $63.3 billion in revenue during Q2, up 17% from the year-ago period. Alphabet said its AI features are driving increased search usage overall, and AI Mode already has 1 billion monthly active users despite only launching globally last October.
Alphabet's cloud unit grew faster still. Its revenue surged by 82% during Q2, to $24.8 billion. Alphabet says 90% of the Fortune 100 companies are already using its Gemini Enterprise platform.
Behind that growth sits a $514 billion order backlog as of June 30, a $50 billion increase from the first quarter of 2026. Most of that backlog came from AI customers who were waiting for more data center capacity to come online, so Alphabet has to build more infrastructure to meet their needs.
Why the spending unsettles investors
Data centers and chips usually have a useful life of several years, so Alphabet depreciates the infrastructure over time rather than accounting for the costs up front. These capex sums could therefore erode the company's profits for years to come, which won't be a problem if AI computing capacity and enterprise tools remain in high demand — but that isn't a guarantee.
Earnings jumped 294%, free cash flow turned negative
Alphabet's Q2 earnings soared by 294% year over year to $9.11 per share. That increase came from a $98 billion increase in the value of its investment holdings in companies like Anthropic and Space Exploration Technologies, which had nothing to do with its operating performance. Excluding those gains and factoring in capex, Alphabet generated negative free cash flow of $5.8 billion during Q2.
The stock trades at a price-to-earnings ratio of 24.3, against 33.4 for the Nasdaq-100 index. That valuation suggests it's cheaper than a basket of its big-tech peers, though the stock might be far more expensive than it appears at face value after accounting for investment gains and capex.
Source: The Motley Fool
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