Why we're sticking with Alphabet despite an imperfect quarter and more AI spending
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- Alphabet reported Q2 revenue of $119.8 billion (24% YoY), beating the $116.9 billion consensus, but EPS of $9.11 included a $99 billion contribution from equity investment gains on its SpaceX and Anthropic stakes, leaving operational earnings closer to $2.85 per share versus the $2.89 estimate.
- Alphabet raised its 2026 capex guidance to $195-205 billion (from $180-190 billion in April), with executives confirming capex will "increase significantly in 2027" even as quarterly free cash flow turned negative.
- Google Cloud revenue accelerated to 82% YoY growth (up from 63% in Q1 and 48% in Q4 2025), with backlog climbing to $514 billion from $460 billion the prior quarter.
- Alphabet shares fell 3%+ in after-hours trading, extending a slide from the May 13 record close of $402.62, with the June-announced $85 billion fundraising effort that includes a $40 billion at-the-market offering starting in Q3 adding supply-side pressure.
- Google Search revenue missed expectations despite roughly 17% YoY growth, though CEO Sundar Pichai said AI Mode has surpassed 1 billion monthly active users and the Gemini app now has 950 million MAUs with daily actives tripling year-over-year.
- Gemini model APIs are processing roughly 22 billion tokens per minute, up from over 16 billion in the prior quarter, and Alphabet released a trio of more specialized models this week including one targeted at cybersecurity tasks.
Why it matters: The $99 billion SpaceX and Anthropic paper gain artificially inflated headline EPS to $9.11, revealing that operational earnings actually fell short of the $2.89 consensus. Combined with the raised $195-205 billion capex outlook and the looming $40 billion ATM stock supply starting this quarter, Alphabet is asking investors to accept mounting infrastructure spend today for AI returns that, while showing traction in Cloud and Gemini usage, remain unproven in core Search monetization.
