Alphabet Inc., the parent company of Google, is set to report its second-quarter earnings for 2026 after the market closes on July 22nd. The market's current focus is intensely fixed on a central question: are the ongoing capital expenditures (Capex) for the AI era a profit-eroding burden or a forward-looking investment that will fuel future growth?
In a report released on July 20th, Deutsche Bank suggests that while concerns persist over a potential slowdown in search growth, delays in the new Gemini model launch, and continued heavy AI investment, the real variable to watch is not the Capex itself. Instead, the potential for Google Cloud revenue growth to significantly exceed current expectations could be the key. If cloud demand materializes as anticipated, the incremental profits generated over the coming years could more than offset the higher AI investment intensity, leaving room for further upward revisions to the company's overall profitability.
Key Investor Focus: Cloud Momentum Over Capex
For investors, the critical takeaway from this earnings report may not be whether Capex continues to rise, but rather how management frames the demand outlook for cloud services, the backlog dynamics, and the expected pace of future revenue realization. These signals will likely determine whether the market re-evaluates Alphabet's valuation framework amid this AI investment cycle.
Google Cloud: The Core Valuation Driver
Deutsche Bank's most optimistic projections are centered on Google Cloud. The analysts have raised their second-quarter revenue growth forecast for the segment from 65% to 70%, with further acceleration to 75% expected in the second half of 2026.
This forecast is based on three key observations. First, demand for AI computing power continues to outstrip supply, with Google recently even leasing some capacity from SpaceX. Second, Google Cloud's backlog reached $462 billion by the end of Q1 2026, a 400% year-over-year increase. Third, some major cloud providers, including Amazon, have already begun raising prices for certain services.
More importantly, Deutsche Bank believes the market is significantly underestimating Google Cloud's future revenue scale. The bank projects 2027 revenue could reach $190-195 billion, starkly higher than the consensus estimate of around $142 billion. Assuming a 30% operating margin, this additional revenue alone could contribute approximately $15 billion in GAAP operating profit, equating to roughly $1 in additional earnings per share.
Capex Will Rise, But So Will Funding Capacity
In line with AI infrastructure build-out, Deutsche Bank has also substantially increased its capital expenditure forecasts for Alphabet. The company previously guided for 2026 Capex of $180-190 billion and indicated 2027 would see a "significant increase" from this year.
Factoring in the order backlog, Deutsche Bank estimates Google needs about 11.5 GW of compute capacity to meet existing demand, with a baseline scenario requiring an additional ~10 GW by 2027. At a cost of roughly $30-35 billion per GW, the bank projects 2027 Capex of approximately $325 billion, up from a prior $250 billion estimate, with 2028 Capex rising further to $365-370 billion.
However, the analysts note that because Google uses a hybrid deployment of its own TPUs and Nvidia GPUs, its unit construction costs may be lower than market fears.
Simultaneously, the company's funding capacity remains robust. This quarter, Alphabet has already raised approximately $65-70 billion through various means, including a $10 billion investment from Berkshire Hathaway, two equity offerings totaling about $36 billion, an at-the-market (ATM) offering program of up to $40 billion, and multi-currency senior note issuances.
As of the end of Q1 2026, the company held about $127 billion in cash and investments, plus approximately $107 billion in non-marketable securities. Deutsche Bank forecasts cumulative operating cash flow will reach around $420 billion by the end of 2027.
The bank argues that Alphabet's issue is not "excessive Capex," but rather a market overly focused on the investment while underestimating the speed of Google Cloud's revenue realization.
Search Growth Intact, Ad Budgets Shifting to AI
Regarding Google's search business, the market's primary concern stems from AI Overview potentially altering traditional search traffic patterns.
However, Deutsche Bank's channel checks reveal a new trend in advertiser behavior. While some advertisers are maintaining their original search budgets, an increasing number of brands are beginning to allocate ad spend towards AI Overview, while also boosting advertising on Google Search and AI-related ads on platforms like ChatGPT.
Concurrently, data from SimilarWeb shows that Google website visits and page views improved in Q2 2026 compared to Q1. Based on this, Deutsche Bank maintains its forecast for Google Search revenue to grow 16.5% year-over-year on a constant currency basis in Q2, with an estimated 14% growth in Q3.
Analysts believe that even if the new Gemini model launch is slightly delayed, current AI models are already consistently improving ad delivery efficiency, and the fundamental health of the advertising business remains intact.
Gemini Delay Not Decisive, User Growth Continues
The delayed launch of Gemini has become another focal point for the market. Google indicated at its I/O 2026 event that Gemini 3.5 Pro would follow, but the new model has not yet been officially released.
Nevertheless, Deutsche Bank contends the model's release timing has not altered user growth trends. SimilarWeb data shows Gemini's web visits and page views continued to grow in Q2, albeit at a slower pace. Sensor Tower data indicates Gemini App downloads have declined from their 2025 peak, but total sessions continue to grow.
In a comparative view, ChatGPT maintains a lead, but its session volume has largely stabilized over the past 12 months; Meta AI has seen significant growth following the launch of Muse Spark; while Grok has experienced declines in both downloads and sessions this year.
Therefore, Deutsche Bank views the adjustment to Gemini's launch timeline as a short-term event that does not change Alphabet's long-term AI competitiveness.
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