Google earnings report review: keep the music going, keep the dancing going

Written by: Trend Research

Google’s earnings report is clearly better than expected overall.

In my view, the key focus is not how much net profit grew, but two questions that have been answered: first, AI has not yet destroyed the search business; second, Google’s AI investment has started to convert into revenue through its cloud segment.

Alphabet’s second-quarter revenue was $119.8 billion, up 24% year over year; operating profit was $40.8 billion, up 30%, and the operating profit margin increased from 32% to 34%. This shows that even with a major increase in AI spending, Google’s core business still maintains strong profitability.

Search business not crushed by AI

Google search revenue reached $63.3 billion, up 17%.

Previously, the biggest concern in the market was that AI products like ChatGPT and Perplexity would reduce users’ use of traditional search, thereby shaking Google’s most core advertising business. But for now, AI has not clearly diverted traffic away from Google Search. Instead, AI summaries and other new features have increased search usage.

This is extremely important for Google—search ads are still the company’s cash cow. As long as this segment does not show a clear downturn, Google will have enough cash to keep investing in AI.

YouTube ad revenue was $11.1 billion, up 13%, and performance also looks relatively steady. Overall revenue from Google’s services business was $94.5 billion, up 15%.

What truly beats expectations is the cloud business

The standout this quarter is Google Cloud.

Cloud revenue was $24.8 billion, up 82%; operating profit rose from $2.8 billion in the same period last year to $8.8 billion. Based on this, the cloud segment’s operating profit margin has already improved from about 21% to about 36%.

This means Google Cloud is no longer just “growing fast in revenue,” but is also starting to generate substantial profits at the same time.

The main driver behind this is that enterprises’ demand for AI compute, models, and data services has grown rapidly.

Gemini Enterprise already covers nearly 90% of the Fortune 100 companies. Gemini app monthly active users reach 950 million, and Google’s model interfaces process about 22 billion tokens per minute.

In other words, Google’s AI story is moving from a “product release” phase to an “enterprise-paid” phase. At least from the cloud business perspective, AI has begun to truly make money.

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

Alphabet’s net profit for the quarter was $112.1 billion, up 298%, and earnings per share reached $9.11.

This figure looks extremely exaggerated, but it includes about $98.0 billion in book gains from equity investments, mainly driven by valuation increases on held securities—not operating profits generated by search, YouTube, or the cloud business.

Therefore, to evaluate Google’s true operating performance this quarter, you should look at operating profit of $40.8 billion, not net profit of $112.1 billion.

Operating profit rose 30% year over year, which is already quite good, but it’s not as astonishing as the net profit number makes it seem.

AI is really burning money

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

The company also raised its full-year 2026 capital expenditure guidance from $180 billion—$190 billion to $195 billion—$205 billion, and it expects 2027 capital expenditures to still increase significantly.

Most of this spending is for AI servers, TPUs, data centers, power, and network infrastructure.

In the second quarter alone, Google even raised substantial funds by issuing common stock, preferred stock, and bonds. This indicates that AI demand is indeed strong, but it also shows that this competition has become an extremely expensive infrastructure war.

What the market is worried about now is not whether “Google has AI,” but how much stable profit Google will be able to generate in the future after spending $200 billion to build AI infrastructure.

If cloud business continues to keep high growth and margins stay at elevated levels, these investments are essentially building the next generation of cash cows in advance. But if AI price competition intensifies and model costs fall quickly, or if customer demand comes in below expectations, these data centers could turn into heavy depreciation pressure.

In summary, this is a quarterly report that is strong on the business side, but one that calls for caution on the cash flow side.

The good news is clear:

Search ads remain strong, and have not been overturned by AI—for now.

Google Cloud revenue and profits are both surging.

Gemini’s user scale and enterprise adoption are rising rapidly.

The company’s overall operating profit margin is still improving.

The risks are also clear:

Net profit has been severely inflated by one-time investment gains.

AI capital expenditures have already surpassed operating cash flow.

Pressure from future depreciation, financing, and equity dilution is likely to rise.

The market needs to see continued growth in AI revenue to prove that the huge spending is worth it.

Google has already demonstrated that it has not fallen behind in AI competition—and it has even started to earn real money through the cloud business. But what needs to be proven next is whether the money earned can cover increasingly massive AI spending.

So, this earnings report is somewhat positive for Google’s long-term logic, but the stock price in the short term may not simply go up. The market will repeatedly weigh “82% cloud business growth” against “full-year capital expenditures above $200 billion.” For the entire US stock market—and even the Korean and A-share markets—this is still positive overall, because the big players are willing to keep pouring more money in, and upstream companies can also keep making big profits.

Cue the music, cue the dance.