JPMorgan Research Report Analysis: Google Cloud Revenue Surges 82%, Recommend Buy on Dips

Written by: Rita

TechFlow Insight

Google's Q2 earnings report highlights two core themes: the accelerated realization of AI commercialization and a further upward revision of capital expenditure expectations.

Cloud revenue grew 82% year-over-year, search business grew 17% year-over-year, and TPU contributed over $1 billion in revenue for the first time in a single quarter. AI drivers have permeated all of Google's business lines. The company revised its 2026 capital expenditure guidance from the range of $180 billion to $190 billion up to the range of $195 billion to $205 billion, and indicated that capital expenditure in 2027 will continue to grow significantly. JPMorgan predicts 2027 capital expenditure will reach $378 billion, a 85% year-over-year increase.

JPMorgan maintains an Overweight rating on Google, with a target price of $420, corresponding to 25 times price-to-earnings ratio based on 2028 GAAP earnings per share of $16.66, suggesting buying on dips. The institution believes that AI investment has entered the return realization period, the upward revision of capital expenditure is demand-driven, and margin pressure is a temporary phenomenon. If the market sells off due to concerns about the scale of capital expenditure, it will constitute a good entry point.

Cloud Business Growth Continues to Exceed Expectations, AI Commercialization Accelerates

In Q2, Google Cloud achieved revenue of $24.77 billion, a 82% year-over-year increase, with growth rate continuously rising. End-of-period backlog reached $514 billion, a quarter-over-quarter increase of $52 billion, of which approximately 50% is expected to be recognized as revenue within the next 24 months.

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

The TPU business recognized revenue independently for the first time in Q2, with JPMorgan estimating single-quarter revenue exceeding $1 billion. Google adopts a direct sales model, not a licensing model, and revenue is recognized on a gross basis. Currently, most TPU orders have been included in the backlog, expected to be delivered centrally in 2027, and TPU revenue will continue to be released in 2026.

Search Business Resilience Exceeds Expectations, AI Drives Incremental Queries

The market previously generally worried that AI would divert search traffic, but Q2 data shows the opposite trend. Search and other business revenue grew 17% year-over-year, with major vertical industries such as retail, finance, and technology all achieving positive contributions.

Monthly active users of AI features exceeded 1 billion, continuously contributing incremental search requests. AI optimization improved shopping ad relevance by 20%, approximately 500,000 advertisers have adopted the AI Max tool, driving billions-level new monetizable queries. YouTube ad revenue grew 13% year-over-year, driven by both brand advertising and performance advertising, with FIFA World Cup related placements also contributing.

Capital Expenditure Revised Upward Again, Demand-Driven Rather Than Cost Pressure

The company revised its 2026 capital expenditure guidance from the range of $180 billion to $190 billion up to the range of $195 billion to $205 billion, an upward adjustment of approximately $15 billion. JPMorgan pointed out that this upward revision is mainly due to the company accelerating computing power delivery to match strong demand, rather than caused by upstream cost increases. 2027 capital expenditure will continue to grow significantly, and the bank's forecast value has been revised up to $378 billion, a 85% year-over-year increase.

Concerns in the market about the scale of capital expenditure are reasonable, but the structure of funding sources needs attention. In Q2, the company completed approximately $20 billion in bond issuance and $85 billion in equity financing to support capital expenditure. Management indicated no plans to return to the equity market for now, subsequently focusing on operating cash flow plus incremental bond issuance, maintaining capital expenditure while keeping the balance sheet healthy.

Profit Margins Under Short-Term Pressure, Long-Term Recovery Trend Clear

Q2 operating profit margin was 34.0%, slightly lower than JPMorgan's expectation of 34.4%. Margin pressure mainly comes from one-off and phase-specific factors: third-party computing power leasing to make up for self-built capacity gaps; TPU hardware sales, where hardware gross margin is lower than software; Wiz integration costs; accelerated depreciation and legal fees, etc., none of which are structural deterioration. The bank expects that as self-built capacity gradually lands and TPU revenue scale effects emerge, profit margins will steadily recover.

TechFlow Perspective

The core signal of this earnings report is that Google's AI investment has moved from the "money-burning period" to the "revenue realization period". Cloud business growth rate has continuously risen, TPU contributed revenue independently for the first time, and search business not only was not diverted by AI but instead accelerated growth, with multiple data points confirming that the AI commercialization process is faster than market expectations.

The market is still accustomed to evaluating Google using the traditional framework of "capital expenditure, profit margins", but JPMorgan believes this analysis framework needs updating. The upward revision of capital expenditure is demand-driven, customer computing power demand is strong, and the company needs to accelerate delivery pace; margin pressure is a phase-specific phenomenon, being transition costs rather than structural deterioration. If the market continues pricing with the old framework, it may bring positioning opportunities.

Google's financing strategy is also worth attention. The combination of $20 billion bond issuance plus $85 billion equity financing in Q2 not only reflects management's determination to increase capital expenditure but also indicates their unwillingness to let the balance sheet come under excessive pressure. The $85 billion equity financing scale is relatively rare among tech giants, but JPMorgan judges this to be a one-time operation, and there will be no further equity financing subsequently.

Disclaimer

This article is a compilation and interpretation by TechFlow Research of a third-party broker research report, namely JPMorgan's research report dated July 23, 2026. The ratings, target prices, earnings forecasts, and related judgments cited in the text are the views of the broker's analysts, representing only their institution's stance, not representing the views of TechFlow Research, nor constituting any investment advice.

The market has risks, decisions need to be independent. This article should not be used as a basis for buying or selling any securities.