Alphabet's Google Cloud surges 82% as enterprise AI spending accelerates

Google Cloud's revenue accelerated to $24.8 billion in the second quarter, up 82% from a year earlier, as enterprise customers signed multiyear AI contracts faster than Alphabet can build data centers to serve them.

"Nearly 90% of the Fortune 100 is using Gemini Enterprise," Chief Executive Officer Sundar Pichai said on the earnings call. Gemini models now process 22 billion API tokens per minute, and the Gemini app has 950 million monthly active users.

The cloud segment's operating income jumped to $8.81 billion from $2.83 billion a year ago, pushing margins to 35.6% from 20.8%. Consolidated revenue reached $119.80 billion, beating the $116.82 billion consensus estimate, while earnings per share of $9.11 marked the company's 11th straight quarterly beat. Search revenue rose 17%, defying predictions that AI chatbots would erode Google's core advertising business.

Alphabet raised its 2026 capital expenditure outlook to as much as $205 billion, up $15 billion from the prior range, and said 2027 spending will increase further. The company is renting third-party compute capacity from SpaceX to fill immediate shortages. At roughly 14 times trailing earnings, Alphabet trades at a steep discount to Microsoft at 30 times and Amazon at 35 times, even as its cloud business grows faster than both.

The acceleration is unusual for a business at Alphabet's scale. Google Cloud grew 34% in the third quarter of 2025, 48% in the fourth quarter, 63% in the first quarter of 2026, and 82% in the second quarter — a trajectory that typically decelerates as revenue bases expand. The backlog of signed contracts stood at $514 billion, up from $460 billion in the first quarter, giving management visibility into years of committed spending.

Nearly 500 Gemini enterprise customers each processed more than 1 trillion tokens over the past year, Pichai said. The company's AI infrastructure is operating at full capacity, with Chief Financial Officer Anat Ashkenazi telling analysts that demand continues to outpace Alphabet's ability to build data centers.

The CapEx Trade-Off

The spending comes at a cost. Capital expenditure doubled to $44.92 billion in the quarter, pushing free cash flow to negative $5.86 billion. Long-term debt rose to $98.2 billion from $46.5 billion a year earlier, and Alphabet suspended its share buyback program in the second quarter. The company ended the period with $242.47 billion in cash and marketable securities.

The market's reaction reflected the tension. Alphabet shares fell 7% on the day after earnings before recovering, and the stock now trades 6.4% below its 20-day moving average. Analysts remain broadly bullish: 58 rate it a buy, seven a hold, and none a sell, with a consensus price target of $418.60, implying roughly 27% upside from current levels near $327.

For investors, the question is whether the infrastructure spending will generate returns commensurate with the outlay. The $514 billion backlog suggests customers have already committed to paying for the capacity Alphabet is building. JPMorgan's Doug Anmuth maintained an Overweight rating with a $420 target, while TD Cowen's Michael Elias kept a Buy rating at $475, calling the cloud acceleration "the most compelling growth story among the hyperscalers."

Alphabet's dividend, raised 5% to $0.22 per share earlier this year, and its $73.27 billion in free cash flow from fiscal 2025 provide a cushion. But the suspension of buybacks signals that management sees higher returns from investing in AI infrastructure than from repurchasing shares — a bet that will be measured in quarters, not weeks.

This article is for informational purposes only and does not constitute investment advice.