Google’s earnings report looks impressive, but why isn’t Wall Street buying it?

Original | Odaily Planet Daily (@OdailyChina)

Author｜Azuma (@azuma_eth)

On the morning of July 22 Beijing time, Alphabet, Google’s parent company, released its 2026 Q2 financial report after the close of trading on the US stock market.

If you look purely at the performance figures, this is an almost perfect report card. In Q2, Alphabet generated revenue of $119.8 billion, up 24% year over year, and operating profit of $40.8 billion, up 30% — the company has maintained double-digit revenue growth for the 12th consecutive quarter, and its core business continues to show very strong growth resilience.

• Odaily Note: As shown in the table above, many investors focused on this quarter’s explosive EPS of $9.11 (net income per share) for Google, emphasizing that the figure is far higher than $2.31 in the same period last year. But this is mainly because the valuation increase of its 14% stake in Anthropic was included. If the related gains are excluded, EPS would be only $2.85, below the market’s expectation of $2.95.

Among them, Google Cloud — the area attracting the most market attention — delivered a result far beyond expectations. Last quarter, Google Cloud revenue reached $24.77 billion, up 82% year over year, making it Alphabet’s fastest-growing business segment.

Meanwhile, Google’s traditional stronghold remains stable. Google Services revenue was $94.54 billion, up 15% year over year. Within that, revenue from search and other services was $63.27 billion, up 17%; and YouTube advertising revenue was $11.06 billion, up 13%.

From revenue and profit to AI business progress, Google has almost delivered every answer investors want to see. But interestingly, after the earnings release, Alphabet’s stock price did not rise; instead, it fell by nearly 3% in after-hours trading.

Why isn’t the market buying it? The reason is not difficult to understand — compared with “how much money Google made,” the market now cares more about “how big of a price Google has to pay to win in the AI era.”

Capex surges to $200 billion; free cash flow turns negative for the first time

In the past few years, driven by continuously generating profits from businesses such as search and advertising, Google has been one of the most cash-rich companies among global tech giants. But as AI competition enters an intense phase, this model is changing rapidly.

To compete for a leading position in AI infrastructure, Alphabet is continuously increasing investment. In Q2, Alphabet’s capital expenditures reached $44.9 billion (above the market expectation of $44.2 billion), and it raised its full-year 2026 capital expenditure guidance from the previous $180 billion–$190 billion to $195 billion–$205 billion.

In terms of spending categories, most of the funds will be used for AI infrastructure build-outs such as servers, data centers, and network equipment. That means that just in this single year, Google could be putting nearly $200 billion into betting on AI.

The massive investment has already brought new pressure to Google. In Q2, due to rapidly growing capital expenditures, Alphabet’s free cash flow turned negative for the first time — cash flow from operating activities was $39.1 billion, while capital expenditures were $44.9 billion, resulting in free cash flow of -$5.86 billion.

At the investor call after the financial report was released, Alphabet CFO Anat Ashkenazi also acknowledged the cash-flow issue: “Investments in AI infrastructure will continue to put pressure on the income statement and cash flow.”

In addition, it is worth noting that, to support the continued expansion of AI infrastructure, Google has already started raising large amounts of debt. In June, Alphabet completed a stock offering and issuance of convertible preferred stock, raising net proceeds of about $49.6 billion. At the same time, the company issued $20.3 billion of senior unsecured notes to supplement its capital needs.

For a company that has previously won investor favor largely by relying on its cash-flow advantages over the long term, this is undoubtedly an important change. Of course, the market is not opposing Google’s continued investment in AI. The real question is: “How long will it take for these investments to turn into a new growth curve?”

Google Cloud performs impressively, but still not enough

Fortunately, the revenue performance of Google Cloud in the Q2 earnings report can, to some extent, ease some investors’ anxiety.

Training enterprise models and deploying AI applications require a large amount of computing power, and cloud services are the key entry point connecting AI capabilities with business customers. In Q2, Google Cloud revenue reached $24.77 billion, up 82% year over year. It not only far exceeded earlier market expectations, but also set the fastest growth rate in recent years.

More importantly, the core driving force behind cloud business growth has gradually shifted from traditional cloud computing demand to AI infrastructure and enterprise-level AI solutions. Alphabet stated in its earnings report that this quarter’s Google Cloud growth mainly came from enterprise AI infrastructure demand, Google Cloud Platform (GCP) AI solutions, and growth in core cloud services.

At the same time, Google Cloud’s order backlog continues to expand. As of the end of Q2, Google Cloud’s remaining performance obligations (RPO) reached $514 billion, up further from the previous quarter. Among them, more than half is expected to be recognized as revenue within the next 24 months. At least for now, Google’s investment in AI infrastructure is not just chasing a technology race — it has begun to translate into actual business growth.

Compared with other AI tech giants, Google’s biggest advantage is that it has a more complete industry chain: from the Gemini model, to in-house developed TPU chips, and then to the Google Cloud platform, Google can cover multiple links in AI infrastructure.

The current rapid growth trend of Google Cloud can also be seen as a partial, stage-by-stage accounting for AI investment returns… but that still isn’t enough. Even though Google Cloud’s annualized revenue scale has already reached about $100 billion, Alphabet’s full-year capital expenditures have climbed to $200 billion.

As AI infrastructure investment continues to expand, whether future revenue growth can maintain a sufficient pace to ultimately cover this capital investment — the market does not yet have an answer. Judging from the magnitude of the after-hours decline, the market may be adopting a more cautious stance.

Gemini’s “intelligence” has become the biggest hidden concern?

If Google Cloud has proven that Google is capable of capturing commercial gains from the AI wave, then Gemini determines whether Google can maintain its lead in this long-term competition.

In the past few years, Google has consistently emphasized its “full-stack AI” strategy. From the underlying TPU chips and data centers to the Gemini model, and then to the Google Cloud platform, Google has been trying to build a complete system that covers both AI infrastructure and an application ecosystem.

And based on the data disclosed in the earnings report, Gemini’s user base is also growing quickly. Currently, Gemini App monthly active users have reached 950 million; the Gemini model API processes about 22 billion Tokens per minute; and at the same time, nearly 90% of Fortune 100 enterprises are using Gemini Enterprise.

These data show that Google has not missed the wave of AI commercialization. However, at the same time, market concerns about Gemini still remain.

The reason is that the core of AI competition is not only user numbers and the scale of infrastructure; model capability also determines the attractiveness of the ecosystem. Previously, concerns were triggered by the planned launch of Gemini 3.5 Pro being delayed, especially in high-value application scenarios such as AI programming and intelligent agents (Agents). As competitors such as Anthropic and OpenAI iterate quickly, Gemini appears to show clear signs of falling behind.

For Google, the most important question right now is whether Gemini can still prove that it remains in the first tier.

Previously, Google’s biggest advantage was having a globally leading search entry point, strong engineering capabilities, and abundant data resources. But in the AI era, competition rules are changing. User habits may shift from traditional search to AI assistants, and developers may also prioritize stronger model ecosystems. If Gemini cannot prove itself, then even if Google has the most comprehensive infrastructure, it may still face the risk that application value will be captured by other models.

AI competition shifts to focusing on “value realization”

Looking back, Alphabet’s earnings report presents a very clear two-sided picture.

On the one hand, Google is proving that AI investment is not just a fantasy of the capital markets. The rapid growth of Google Cloud, the continued increase in demand for AI infrastructure, and the expansion of Gemini’s user base all indicate that AI is gradually moving from a technological wave to real business needs; but on the other hand, the market’s caution is not without reason. Nearly $200 billion in annual capital expenditures, free cash flow turning negative for the first time, and model performance under intense competitive pressure all mean Google needs to prove to investors that this AI bet will ultimately deliver long-term returns that exceed the cost of investment.

And the challenges Google faces are also the problems the entire AI industry is dealing with. In recent years, technology giants such as Microsoft, Amazon, and Meta have also continued to expand AI infrastructure investment. Data centers, computing power, and chip procurement have long become the main battleground for these giants’ competition.

In the future, the market’s focus may no longer be on who invests the most, but on who can convert capital deployment into commercial value faster. For Google and other giants, the AI race may only be entering a critical stage.