Google Earnings Commentary: The Party Goes On

By: Chaoxiang Research

Google's financial report was overall significantly better than expected.

In my view, the focus should not be on how much net profit grew, but rather that two questions have been answered: First, AI has not yet destroyed the search business; Second, Google's AI investments have begun to convert into revenue through the cloud business.

Alphabet's second-quarter revenue was $119.8 billion, a 24% year-over-year increase; operating profit was $40.8 billion, up 30% year-over-year, and the operating profit margin increased from 32% to 34%. This indicates that despite significantly increasing AI investments, Google's core business has maintained good profitability.

Search Business Not Crushed by AI

Google Search revenue reached $63.3 billion, a 17% year-over-year increase.

Previously, the market was most concerned that AI products like ChatGPT and Perplexity would reduce user usage of traditional search, thereby shaking Google's core advertising business. However, currently, AI has not significantly diverted Google Search traffic; instead, new features like AI Overviews and AI Mode have increased search usage.

This is very important for Google; search advertising remains the company's cash cow. As long as this business does not decline significantly, Google will have sufficient cash to continue investing in AI.

YouTube advertising revenue was $11.1 billion, a 13% year-over-year increase, showing relatively stable performance. Google Services overall revenue was $94.5 billion, up 15% year-over-year.

What Truly Exceeded Expectations is the Cloud Business

The highlight of this quarter was Google Cloud.

Cloud revenue was $24.8 billion, a 82% year-over-year increase; operating profit rose from $2.8 billion in the same period last year to $8.8 billion. Calculated this way, the cloud business operating profit margin has increased from approximately 21% to approximately 36%.

This means Google Cloud is no longer just about "rapid revenue growth," but has begun to contribute considerable profit simultaneously.

The reason behind this is mainly the rapid growth in enterprise demand for AI computing power, models, and data services.

Gemini Enterprise has covered nearly 90% of Fortune 100 companies, Gemini app monthly active users reached 950 million, and Google's model interfaces process approximately 22 billion tokens per minute.

In other words, Google's AI story is moving from the "product launch" phase to the "enterprise payment" phase; at least from the cloud business perspective, AI has started to truly make money.

Net Profit Grew Nearly Threefold, But Do Not Be Misled by This Number

Alphabet's net profit for this quarter reached $112.1 billion, a 298% year-over-year increase, and earnings per share reached $9.11.

This number looks very exaggerated, but it includes approximately $98 billion in book gains from equity investments, mainly from valuation increases of held securities, not operating profits earned from Search, YouTube, and Cloud businesses.

Therefore, to evaluate Google's true operating performance for this quarter, one should look at the $40.8 billion operating profit, not the $112.1 billion net profit.

Operating profit increased 30% year-over-year, which is quite good, but not as astonishing as the net profit figure appears.

AI Is Simply Too Cash-Intensive

Google's capital expenditures in the second quarter reached $44.9 billion, almost double that of the same period last year, and even exceeded the operating cash flow of $39.1 billion for the quarter, resulting in negative free cash flow of $5.9 billion.

The company also raised the full-year 2026 capital expenditure expectation from $180 billion–$190 billion to $195 billion–$205 billion, and expects capital expenditures in 2027 to increase significantly.

These funds are mainly used for AI servers, TPUs, data centers, power, and network facilities.

Google even raised a large amount of funds in the second quarter through issuing common stock, preferred stock, and bonds. This shows that AI demand is indeed strong, but also indicates that this competition has become an extremely expensive infrastructure war.

Now the market is no longer worried about "whether Google has AI," but rather how much stable profit Google's $200 billion investment in AI infrastructure will generate in the future?

If the cloud business continues to maintain high growth and profit margins remain at a high level, these investments are building the next generation of cash cows in advance; but if AI price competition intensifies, model costs drop rapidly, or customer demand is lower than expected, these data centers could become a heavy depreciation burden.

In summary, this is a financial report that is strong at the business level but requires vigilance at the cash flow level.

The good points are clear:

• Search advertising remains strong and has not been disrupted by AI for now;
• Google Cloud revenue and profit exploded simultaneously;
• Gemini user scale and enterprise adoption rate are rapidly increasing;
• The company's overall operating profit margin is still improving.

The risks are equally clear:

• Net profit was severely amplified by one-time investment gains;
• AI capital expenditures have exceeded operating cash flow;
• Future depreciation, financing, and equity dilution pressure will rise;
• The market needs to see continued growth in AI revenue to prove the huge investment is worthwhile.

Google has proven it has not fallen behind in the AI competition and has even started to make real money through the cloud business; but what needs to be proven next is whether the money earned can cover the increasingly massive AI investments.

Therefore, this financial report is slightly bullish for Google's long-term logic, but the short-term stock price may not simply rise. The market will repeatedly weigh between "cloud business growth of 82%" and "full-year capital expenditures exceeding $200 billion," but for the entire US stock market, and even the Korean and A-share markets, it is bullish, after all, the financiers are willing to pour more money, and the upstream players can earn heavily again.

Keep playing the music, keep dancing.