Googel Q2 cloud revenue surges 82%! JPMorgan: AI is entering the payback period, buy on dips

Google’s Q2 earnings are impressive: cloud business revenue surged 82%, AI investment is entering the payback period, and JPMorgan maintains an Overweight rating.
(Background: Anthropic poured $200 billion over five years into Google Cloud! Two new AI startups are eating half of the orders from the four major cloud providers)
(Background addition: Qualcomm landed a major AI chip order from ByteDance! Hundreds of millions of ASIC chips for customers; the stock price jumped 8.3% to a record high)

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• Cloud growth continues to exceed expectations, accelerating AI commercialization
• Search business resilience exceeds expectations, with AI driving incremental queries
• Capital expenditures raised again, driven by demand rather than cost pressure
• Profit margin under pressure in the short term, with a clearly defined long-term recovery trend
• Tide-view perspective

Google’s latest financial results show strong performance: cloud revenue rose 82% year over year to a new high, and its AI commercialization rollout is clearly speeding up. JPMorgan analysts said this signals that Big Tech’s AI spending has moved into a return phase rather than being just a burn-money period. The increase in capital expenditures is mainly driven by customer demand, not cost pressure. If the market sells off due to concerns about the scale of capital expenditures, it could actually be a good time to position. The firm maintains an Overweight rating, with a target price of $420, implying a 25x P/E based on 2028 GAAP earnings per share of $16.66.

Google’s Q2 earnings show two main lines: AI commercialization is accelerating into realization, while capital expenditure expectations are raised again.

Cloud revenue grew 82% year over year, search business revenue grew 17% year over year, and TPU’s first-quarter contribution to revenue exceeded $1 billion. AI-driven momentum has permeated Google’s business lines. The company raised its 2026 capital expenditure guidance from the $180 billion–$190 billion range to the $195 billion–$205 billion range, and warned that 2027 capital expenditures will continue to grow significantly. JPMorgan predicts 2027 capital expenditures will reach $378 billion, up 85% year over year.

JPMorgan maintains an Overweight rating for Google, with a target price of $420, implying a 25x price-to-earnings multiple on 2028 GAAP EPS of $16.66, and recommends buying on dips. The firm believes AI investment has entered a payback and realization phase; capital expenditure increases are demand-driven; and margin pressure is a temporary phenomenon. If the market sells off due to worries about capital expenditure scale, it would create a relatively good timing for positioning.

Cloud growth continues to exceed expectations, accelerating AI commercialization

In Q2, Google Cloud generated revenue of $24.77 billion, up 82% year over year, with growth continuing to accelerate. Ending backlog reached $514 billion, adding $52 billion quarter over quarter, of which about 50% is expected to be recognized as revenue within the next 24 months.

The number of new customers doubled year over year, and consumption by existing customers exceeded committed usage by more than 50%. Gemini API processed volume increased from about 16 billion Tokens per minute in Q1 to 22 billion Tokens per minute, up 37.5% quarter over quarter. About 90% of Fortune 100 companies have adopted Gemini Enterprise, with more than 9 million monthly active developers.

In Q2, TPU business was recognized as revenue independently for the first time. JPMorgan estimates that quarterly revenue exceeds $1 billion. Google uses a direct sales model with a non-licensing approach, with revenue recognized on a gross basis. Currently, most TPU orders have been included in backlog; delivery is expected to be concentrated in 2027, and TPU revenue will continue to be released throughout 2026.

Search business resilience exceeds expectations, with AI driving incremental queries

The market previously widely worried that AI would divert search traffic, but Q2 data shows the opposite trend. Search and other revenues grew 17% year over year, and major vertical industries such as retail, financial services, and technology all contributed positively.

Monthly active users of AI features exceeded 1 billion, continuing to drive incremental search requests. AI optimization improved the relevance of shopping ads by 20%. About 500k advertisers have adopted the AI Max tool, driving tens of billions of additional monetizable queries. YouTube ad revenue rose 13% year over year, supported by both brand advertising and performance advertising, and FIFA World Cup-related spending also contributed.

Capital expenditures raised again, driven by demand rather than cost pressure

The company raised its 2026 capital expenditure guidance from the $180 billion–$190 billion range to the $195 billion–$205 billion range, an increase of about $15 billion. JPMorgan said this increase is mainly because the company is accelerating the delivery of computing capacity to match strong demand, rather than due to rising upstream costs. 2027 capital expenditures will continue to grow significantly; the firm has raised its forecast to $378 billion, up 85% year over year.

Market concerns about the scale of capital expenditures are reasonable, but attention should be paid to the structure of funding sources. In Q2, the company completed about $20 billion of debt issuance and $85 billion in equity financing to support capital expenditures. Management said there are currently no plans to return to the equity market; going forward, it will mainly rely on operating cash flow stacked with incremental debt issuance, maintaining capital expenditures while keeping the balance sheet healthy.

Profit margin under pressure in the short term, with a clear long-term recovery trend

In Q2, operating margin was 34.0%, slightly below JPMorgan’s expected 34.4%. Margin pressure mainly came from one-off and transitional factors: third-party compute capacity rentals to make up for gaps in built-out capacity; TPU hardware sales, where hardware gross margin is lower than software; Wiz integration charges; and accelerating depreciation and legal expenses, none of which represent structural deterioration. The firm expects that as built-out capacity gradually comes online and TPU revenue scale effects emerge, profit margin will recover steadily.

Tide-view perspective

The most core signal from this earnings report is that Google’s AI investment has shifted from a “spending to burn” phase to a “revenue realization” phase. Cloud growth has been steadily rising; TPU contributed revenue independently for the first time; and search business not only wasn’t slowed by AI diversion, but actually grew faster—multiple data points confirm that AI commercialization is rolling out faster than the market expected.

The market is still accustomed to evaluating Google using the traditional framework of “capital expenditures and profit margins,” but JPMorgan believes that framework needs updating. The rise in capital expenditures is demand-driven, because customer demand for computing capacity is strong and the company needs to accelerate delivery schedules; margin pressure is a temporary phenomenon resulting from transition costs rather than structural deterioration. If the market continues to price in line with the old framework, it may create opportunities for positioning.

Google’s financing strategy is also worth watching. The combination of $20 billion in debt issuance plus $85 billion in equity financing in Q2 both reflects management’s determination to increase capital expenditures and shows it is unwilling to let the balance sheet be pressured excessively. The $85 billion equity financing is rare among technology giants, but JPMorgan believes this was a one-time move and there won’t be additional equity financing afterward.