After the market closed on Wednesday Eastern Time, Alphabet released its second-quarter financial results. The report showed the company's revenue and profit for the quarter both exceeded expectations, with the Google Cloud division achieving its strongest growth in recent quarters.
However, Google further and significantly raised its full-year expenditure forecast, anticipating capital expenditures for the year to be between $195 billion and $205 billion, driven by strong demand for artificial intelligence.
More concerning for the market was the company's first-ever negative free cash flow. Its stock price declined in after-hours trading, falling over 3% at the time of writing.
Strong Financial Performance
The financial report revealed quarterly revenue of $119.8 billion, a 24% year-over-year increase. Operating profit was $40.77 billion, surpassing market estimates of $40.55 billion.
Net income attributable to common stockholders reached $112.1 billion, higher than the $28.2 billion from the same period last year. However, this figure includes $99.0 billion in net other income, primarily from unrealized gains on equity securities.
Diluted earnings per share were $9.11, significantly higher than the $2.31 reported in the prior-year quarter.
Google Cloud Achieves Record Growth
Google stated that its cloud revenue grew 82% to $24.8 billion, propelled by demand for AI infrastructure and enterprise-grade AI solutions.
Google Services revenue increased 15% to $94.5 billion. Within this, Google Search & other revenue grew 17% to $63.3 billion; YouTube advertising revenue rose 13% to $11.1 billion; and subscriptions, platforms, and devices revenue increased 15% to $12.9 billion.
Further Increase in Capital Expenditure Forecast
For the second quarter, Alphabet's total capital expenditures were $44.92 billion, exceeding the estimate of $44.15 billion. Google's Chief Financial Officer, Anat Ashkenazi, informed analysts on the earnings call that the majority of Google's capital spending is for technical infrastructure supporting AI development. Approximately 60% of this infrastructure investment is for servers, with 40% for data centers and network equipment.
Free cash flow for the quarter was negative $5.9 billion, as spending on property and equipment purchases exceeded cash generated from operating activities. This marks the first time in the company's history it has reported negative free cash flow.
Alphabet also raised its full-year expenditure forecast to a range of $195 billion to $205 billion. Just last quarter, the company had increased its capital expenditure outlook to $180 billion to $190 billion.
Ashkenazi emphasized that Google will continue to invest as long as the returns appear attractive.
"Our capacity has increased significantly over the past three years. But demand has still outpaced the amount of investment," she explained, adding that faster-than-expected delivery of capacity was also a factor in the increased spending.
"We remain in a supply-constrained environment," she stated. "I believe we've been saying this for several quarters now, and we are seeing very strong demand from both external cloud customers and internally within the company."
Leadership Commentary on AI Investment
"Our investments in AI are redefining what's possible across every part of our business," Alphabet CEO Sundar Pichai said in a statement.
Market Analyst Perspective
"Following a quarter of negative cash flow, Alphabet's new capital expenditure plan is not optimistic," said Thomas Monteiro, a senior analyst at Investing.com. "One of the market's most reliable cash flow generators is now spending more than it earns. Investors might tolerate this as long as revenue continues to grow. But the cost of capital is becoming a reality again, and the margin for error is shrinking each quarter."
Financing and Shareholder Returns
To support the expansion of its AI infrastructure, Alphabet stated that in June it raised $49.6 billion through a stock issuance and raised $20.3 billion in the second quarter by issuing senior unsecured bonds. The board also declared a quarterly cash dividend of $0.22 per share for Class A, B, and C stock, payable on September 14, 2026.
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