$205 billion — Google set the most expensive headline for the AI earnings season

Author: bootly, BitpushNews

Cloud business surges 82%, net profit rockets nearly 300%, search traffic hits a record high—Google’s parent company Alphabet delivers an impressive quarterly report, but it can’t stop the stock price from falling by as much as nearly 5% after-hours.

As the first megacap to report in this US tech earnings season, Google sets a delicate tone for Microsoft, Amazon, and Meta over the next few weeks: beating expectations on revenue is no longer enough. Wall Street now only cares about one thing—how much more are you going to burn, and when will you earn it back?

On-paper numbers are almost flawless

Looking purely at the figures, this earnings report is nearly flawless.

Second-quarter revenue was $119.8 billion, up 24% year over year, beating market expectations. Adjusted earnings per share (EPS) were $2.85, slightly below the expected $2.89, but under GAAP terms, EPS reached $9.11—thanks to a windfall of $99 billion: Google’s equity holdings in Anthropic and SpaceX were revalued in the quarter, generating nearly $514B in unrealized gains.

This money lifted net profit from $28.2 billion in the same period last year to $112.1 billion, a 298% increase. Excluding this factor, operating profit also rose to $40.8 billion, up 30%.

Cloud business is the absolute star. Google Cloud’s quarterly revenue was $24.8 billion, up 82% year over year, far above market expectations of $22.4 billion, and also accelerating compared with the previous quarter’s 63% growth rate. Cloud operating profit was $8.8 billion, with the profit margin hitting a record high of 35.6%. Backlog orders reached $51.4 billion, up another $5 billion quarter-over-quarter—enterprise customers are signing long-term AI cloud contracts at an unprecedented pace.

YouTube advertising revenue was $11.06 billion, up 13%, beating expectations. Search revenue was $63.3 billion, up 17%, slightly below the expected $63.4 billion, but search traffic boosted by the World Cup hit a record high—Pichai himself said, “As a football fan, I’m especially excited to see this data.”

Everything is going well. Except for one number.

One CFO line, and the stock falls

During the after-hours earnings call, Chief Financial Officer Anat Ashkenazi said one thing: the company plans to expand the use of third-party cloud providers’ computing power in the third quarter to make up for a shortfall in internal supply. “This will bring short-term pressure on profit margins.”

The moment she said it, the stock slid.

Deepwater Asset Management analyst Gene Munster wrote on X: “Google is down 4% just because the CFO said cloud profit margins will decline in the second half—they’ll need to go find third parties to help, like SpaceX.”

Google has long signed a monthly GPU lease with SpaceX worth $920 million, while Microsoft is spending more and going farther on “new cloud” vendors such as CoreWeave and Nebius. After the CFO’s comments, CoreWeave and Nebius rose 4% and 5% respectively in after-hours—bad news for Google, but clear order signals for them.

Capital expenditures of $205 billion

The profit-margin warning was just the fuse. What truly worries investors is capital spending.

In the quarter, Google spent $44.9 billion on servers and built data centers, doubling year over year. Even more alarming is the full-year guidance: 2026 capital expenditures were raised from the prior $180 billion–$190 billion range to $195 billion–$205 billion.

That means Google plans to pour $200 billion into AI infrastructure this year.

Ashkenazi said, “We’re still supply constrained.” The implication is—if we can’t buy more equipment, we’ll end up spending more.

And what about 2027? She previewed back in April that next year’s capex would increase “significantly” on top of this year’s level. An Evercore analyst estimated the figure at $262 billion.

Investors’ anxiety is understandable: AI infrastructure investment is growing exponentially, but revenue growth is linear. Google’s free cash flow for the quarter has already turned negative, at -$5.9 billion. Revenue is rising, but the rate of spending is rising faster.

TPU profit margin—unknown?

There was another detail in the call that drove analysts crazy: when asked about the difference in profit margins between its in-house chip TPU and external cloud services, the company refused to answer.

Munster commented, “TPUs likely dilute profit margins, but at this stage the scale is still small.” The problem is that nobody knows just how small.

Analyst Matthew Sigel, of CFA and VanEck, tried to break down Google’s token revenue: processing 22 billion tokens per minute, implying an annualized processing volume of about 1.16 quadrillion tokens. Based on market pricing, annualized revenue could be between $1.2 billion and $23 billion. But he emphasized the number may be low because token statistics include a lot of free users and Google’s internal consumption—neither of which contributes to Cloud revenue.

“AI token sales might only account for 5% to 15% of Cloud’s annualized revenue,” Sigel said. He also pointed out that this figure is growing at nearly 40% per year, and that pricing power is shifting toward Google.

The issue is that this 5%–15% contribution has to support annual capital expenditures of $200 billion. No way to tally it makes investors feel at ease.

Overall, market concerns cluster around three areas:

First, capital expenditures are getting out of control.

If 2027 is further increased to more than $260 billion, depreciation, equipment, energy, and data center costs will continue to weigh on profits and cash flow. Google must prove these investments can generate sufficiently high revenue growth and returns on investment.

Second, competition in AI is intensifying.

Google has just delayed the launch of Gemini 3.5 Pro, while Anthropic and OpenAI are iterating quickly. The rise of open-source models in China is also pushing down token prices.

Third, there are hidden risks in the core business.

Although search revenue grew 17% this quarter, the results mostly match market expectations and didn’t bring any obvious surprises. In the third quarter, the business will start facing a higher year-over-year base, meaning search growth rates may face some pressure.

At present, AI search has not clearly disrupted Google’s advertising model, but investors are still watching: as more users get answers directly from AI summaries, will traditional search clicks and ad impressions be impacted? Google Cloud could become a new growth engine, but search ads remain Alphabet’s most important profit source. Google has to both attack in AI and defend the search base business.

That said, Wall Street overall remains somewhat optimistic. The consensus rating from analysts is “Strong Buy,” with an average target price of about $438, implying roughly 27% upside.

Conclusion

Alphabet’s earnings report tells a contradictory story about the “present vs. the future.” The current performance is impeccable, but the market is pricing the future—when will sustainable returns actually arrive?

Pichai said that as long as the company sees attractive returns, it will continue investing. For investors, though, the real question is: when will those returns come? And until they arrive, how much more will be burned?

Google’s stock falling doesn’t mean the market doesn’t believe in AI.

What the market is truly asking is: who can not only spend the most in the AI era, but also turn those investments into sustainable profits and free cash flow first?

This isn’t only Google’s problem—it’s a question the entire AI industry’s next phase must answer.