J.P. Morgan research note interpretation: Google Cloud revenue surged 82%; suggests buying the dip

Author: Rita, Deep Tide

Google’s Q2 earnings report shows two main storylines: the acceleration of AI commercialization turning into tangible results, while expectations for capital expenditures are revised upward again.

Cloud revenue grew 82% year over year, search revenue grew 17% year over year, and TPU contributed more than $1 billion in revenue for the first quarter in a single quarter. AI momentum has permeated every business line at Google. The company raised its 2026 capital expenditure guidance from the $180 billion to $190 billion range to the $195 billion to $205 billion range, and indicated that 2027 capital expenditures will continue to grow significantly. JPMorgan predicts that 2027 capital expenditures will reach $378 billion, up 85% year over year.

JPMorgan maintains an Overweight rating on Google with a target price of $420, implying a 25x price-to-earnings multiple based on 2028 GAAP earnings per share of $16.66, and recommends buying on dips. The firm believes that AI investment has entered a return-realization phase, and that the upward revision to capital expenditures is demand-driven. It views margin pressure as a temporary phenomenon. If the market sells off due to concerns about the scale of capital expenditures, that would create a favorable entry point.

Cloud business growth continues to exceed expectations, AI commercialization ramps up

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

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

TPU business independently recognized revenue for the first time in Q2, and JPMorgan estimates quarterly revenue of over $1 billion. Google uses a direct sales model and a non-authorized model; revenue is recognized under the gross method. Most TPU orders have already been included in backlog orders, with delivery expected to be concentrated in 2027, and TPU revenue is expected to continue to be released throughout 2026.

Search business resilience exceeds expectations, AI-driven incremental queries

The market had widely worried that AI would divert traffic away from search, but Q2 data shows the opposite trend. Revenue from Search and other businesses grew 17% year over year, with positive contributions from major vertical industries such as retail, financial services, and technology.

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

Capital expenditures revised upward again—driven by demand, not cost pressure

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

The market’s concern about the scale of capital expenditures is reasonable, but investors should focus on the structure of funding sources. In Q2, the company completed about $20 billion in debt issuance and $85 billion in equity financing to support capital expenditures. Management said there are currently no plans to return to the equity capital market. Going forward, it will rely mainly on operating cash flow combined with additional debt issuance, to maintain capital expenditures while keeping the balance sheet healthy.

Margins pressured in the short term, clear long-term repair trend

In Q2, operating margin was 34.0%, slightly below JPMorgan’s expected 34.4%. Margin pressure mainly came from one-off and phased factors: third-party compute rental to cover the gap in self-built capacity; TPU hardware sales, with hardware gross margin below software; Wiz integration costs; and accelerated depreciation and legal fees, among others—none of which represent a structural deterioration. The firm expects that as self-built capacity is gradually rolled out and TPU revenue scale effects become visible, margins will recover steadily.

From the perspective of the tide

The most important signal from this earnings report is that Google’s AI spending has shifted from a “burning-money phase” to a “revenue realization phase.” Cloud growth has continued to rise, TPU contributed revenue independently for the first time, and rather than being diluted by AI, search business accelerated—multiple data points confirm that Google’s AI commercialization is progressing faster than the market expected.

The market still tends to evaluate Google using the traditional framework of “capital expenditures and margins,” but JPMorgan believes that this analytical framework needs to be updated. The upward revision to capital expenditures is demand-driven: customers’ compute needs are strong, and the company needs to accelerate delivery cadence. Margin pressure is a temporary phenomenon, reflecting transition costs rather than a structural deterioration. If the market continues to price using the old framework, it could create opportunities to build positions.

Google’s financing strategy is also worth noting. The combination of $20 billion in debt issuance plus $85 billion in equity financing in Q2 not only reflects management’s determination to step up capital expenditures, but also shows that it does not want the balance sheet to be under excessive pressure. The $85 billion equity financing is relatively rare among tech giants, but JPMorgan believes this was a one-time move and that there will be no further equity financing afterward.