Alphabet delivers exceptional cloud growth, although rising investment costs put pressure on Google shares

Google’s parent company Alphabet has reported another strong quarter, with revenue beating expectations and Google Cloud recording its fastest growth to date. However, the company’s decision to increase spending on artificial intelligence infrastructure unsettled investors and sent Alphabet shares lower.

The results present a mixed picture. Google’s core businesses remain strong, but the amount being spent to compete in the AI race is becoming increasingly important for markets.

Google Revenue Reaches $119.8 Billion

Alphabet reported second-quarter revenue of $119.8 billion, representing growth of approximately 24% compared with the same period last year. This was comfortably ahead of Wall Street forecasts of around $116.9 billion.

Advertising revenue, which includes Google Search and YouTube, reached $81.6 billion, slightly exceeding expectations of $81.1 billion. This suggests Google’s traditional advertising business remains resilient despite increasing competition from social media platforms and AI-powered search tools.

Adjusted earnings per share came in at $2.85, narrowly below the $2.89 expected by analysts. However, reported earnings were heavily influenced by large gains on Alphabet’s investments in companies including Anthropic and SpaceX.

Google Cloud Becomes the Main Growth Story

The standout figure was Google Cloud revenue, which increased by 82% to $24.8 billion. Analysts had expected growth of roughly 64%, meaning the division significantly outperformed forecasts.

Key positives from the report included:

• Strong demand for AI computing and data-centre capacity
• Rapid growth across Google Cloud
• Continued strength in Search and advertising
• The first recognition of revenue from direct sales of Google’s TPU chips
• Growing enterprise demand for Gemini and other AI services

Before the results, IG had identified cloud growth, TPU sales and competition between Gemini and ChatGPT as the main areas investors would be watching. The cloud figures clearly impressed, but questions surrounding Gemini’s competitiveness remain.

AI Spending Overshadows the Results

Alphabet increased its expected 2026 capital expenditure to between $195 billion and $205 billion, up from its previous forecast of $180 billion to $190 billion.

The company explained that demand for AI capacity continues to exceed available infrastructure. However, Alphabet also reported negative free cash flow of $5.9 billion, the first negative quarter in its history.

This combination caused concern because investors want evidence that heavy AI spending will eventually produce sustainable profits. Alphabet shares fell sharply following the announcement, despite the revenue beat.

Could Google Shares Be Oversold?

Finviz data shows Alphabet’s RSI at around 31, placing the shares close to technically oversold territory. The stock is also trading below its 20-day and 50-day moving averages, suggesting short-term momentum remains weak.

Analyst sentiment remains more positive. TipRanks showed Alphabet carrying a Strong Buy consensus before the report, while Finviz listed an average analyst price target of approximately $433.

What Could This Mean for Markets and Investments?

Alphabet’s results could affect several areas of the market:

• Semiconductor and memory-chip companies may benefit from continued data-centre spending.
• Cloud competitors such as Microsoft and Amazon will face greater pressure to demonstrate similar AI growth.
• Technology valuations could remain volatile as investors question whether AI investment is becoming excessive.
• Google shares could attract buyers if cloud growth continues and the company demonstrates stronger future cash flow.

The earnings report shows that Google’s AI strategy is producing substantial revenue growth. However, investors are no longer satisfied with growth alone. The next major test will be whether Alphabet can convert its enormous infrastructure investment into sustainable profits and improving free cash flow.

This is a personal market view and not financial advice. Always conduct your own research before investing.

Sources: (Reuters, Tipranks, Finviz, IG)