Equity Research · Earnings Update
Alphabet Inc. (GOOGL)
Summary and key takeaways
Alphabet reported Q2 2026 revenue of $119.8 billion, up 24% (23% in constant currency), with Google Cloud accelerating to 82% growth and $24.8 billion of revenue. Operating income rose 30% to $40.8 billion and operating margin expanded two points to 34%. Diluted EPS of $9.11 was nearly four times last year’s $2.31, but that jump is almost entirely $98.0 billion of other income, mainly net unrealized gains on equity securities — not operations. The number that moved the stock was capital spending: $44.9 billion in the quarter, double a year earlier, turning free cash flow negative (−$5.86B) and lifting the 2026 capex outlook to $195–205 billion. The stock fell −7.13% to $317.69 on July 23, and is +4.08% since, at $330.65.
Results snapshot
| Metric | This quarter | Change / comparison |
|---|---|---|
| Revenue | $119.80B | +24% (+23% constant currency) |
| Google Cloud revenue | $24.77B | +82%; operating income $8.81B vs $2.83B |
| Google Search & other | $63.27B | +17% |
| Operating income | $40.77B | +30%; margin 34% vs 32% |
| Other income, net | $97.98B | vs $2.66B; mainly net unrealized gains on equity securities |
| Diluted EPS | $9.11 | vs $2.31; consensus about $2.88 |
| Capital expenditures | $44.92B | vs $22.45B a year earlier |
| Free cash flow | −$5.86B | vs +$5.30B a year earlier |
| Share repurchases | $0 | vs $13.24B a year earlier |
Analysis
Split the quarter in two and both halves are unusually clear. The operating half was excellent: every advertising line grew except Network, and Cloud’s operating income more than tripled as revenue accelerated. The capital half is what changed. Capex doubled year over year, operating cash flow of $39.1 billion did not cover it, and free cash flow went negative — the only negative quarter in the release’s free-cash-flow reconciliation.
Figure 1 · Segment growth, year over year
Cloud grew five times faster than Search; only Network shrank
Q2 2026 revenue versus Q2 2025 by line. Computed from the segment table in Alphabet’s Q2 2026 release: Cloud $24,768M vs $13,624M; Search & other $63,271M vs $54,190M; subscriptions, platforms & devices $12,911M vs $11,203M; YouTube ads $11,055M vs $9,796M; Network $7,303M vs $7,354M.
The capital side reshapes the balance sheet as well as the cash-flow statement. Alphabet bought back no stock this quarter — it repurchased $13.2 billion a year ago — and instead raised $49.6 billion of equity in June, in common stock and mandatory convertible preferred, plus $20.3 billion of senior notes. That is a company moving from returning capital to raising it, to fund compute. Chief financial officer Anat Ashkenazi said on the call that the higher capex range is “primarily due to an acceleration in the delivery of capacity to meet growing demand.”
Figure 2 · Quarterly free cash flow
Free cash flow went negative as capex doubled
Free cash flow per quarter in $ billions, operating cash flow less capital expenditures. Q3 2025–Q2 2026 from the free-cash-flow reconciliation in Alphabet’s Q2 2026 release; Q2 2025 computed from the same release’s prior-year cash-flow statement ($27,747M less $22,446M).
This is the same funding gap the AI Capex Reality Check measured in Q1, when Alphabet generated $0.28 of free cash flow per $1 of capex. In Q2 that ratio was -0.13 — negative. The thesis that Alphabet self-funds its build-out from the search cash engine held in Q1. It did not hold in Q2.
Guidance
- 2026 capital expenditures raised to $195–205 billion, from $180–190 billion (Q2 earnings call)
- Management said higher infrastructure spending will pressure depreciation, data-center costs and free cash flow
- Alphabet gives no revenue guidance; quarterly dividend of $0.22 per share maintained
What the rebuilt model says
I rebuilt the rebuilt three-statement model (.xlsx) on September 10. The previous version assumed 14% growth and capex at 24% of revenue. Growth now starts at the 23% H1 2026 reported rate. Capex starts at 40% of revenue — the midpoint of the new outlook over FY2026E revenue. The model also stops carrying $24.6 billion a year of securities gains forward as if they were recurring cash. The actual-year cash flow now reconciles to reported cash; the previous version was off by $30.8 billion in FY2025A because buybacks and dividends were missing. $ millions:
| $ millions | FY2025A | FY2026E | FY2027E | FY2028E | FY2029E | FY2030E |
|---|---|---|---|---|---|---|
| Revenue | 402,836 | 495,488 | 574,766 | 655,234 | 733,862 | 807,248 |
| Operating income | 129,039 | 156,079 | 181,051 | 206,399 | 231,166 | 254,283 |
| Capital expenditures | -91,447 | -198,195 | -229,907 | -262,094 | -293,545 | -322,899 |
| Free cash flow (CFO + capex) | 55,526 | -48,360 | -51,166 | -57,641 | -63,578 | -68,661 |
The whole FY2026 answer turns on one input. Here is FY2026E free cash flow at four levels of capital intensity:
| Capex as % of revenue | FY2026E capex | FY2026E free cash flow |
|---|---|---|
| 30% | $148.6B | $1.2B |
| 35% | $173.4B | −$23.6B |
| 40% | $198.2B | −$48.4B |
| 45% | $223.0B | −$73.1B |
Assumptions, stated plainly. Revenue grows 23% in FY2026E, the H1 rate, and then 16%, 14%, 12% and 10% — my assumption, since Alphabet gives no revenue guidance. Capex intensity is a single input held flat through FY2030E. At 40% that is a stress case, not a forecast; if intensity falls after the build-out, free cash flow recovers, and the table shows how much. Operating margin is held near FY2025’s 32%. The June 2026 equity and debt raises post-date the opening balance sheet and are not in it, and the model’s forecast financing is a plug. Held at 40% with no new financing, forecast cash turns negative in FY2028E — the plan needs outside capital, which is what the June 2026 equity and debt raises supplied. This is a sensitivity, not a valuation.
Updated investment thesis
GOOGL is a Core holding at 2.91% of the book and +20.42% on my cost. The Q1 thesis was that Alphabet captures AI-driven cloud demand directly, at expanding margins, backed by a search cash engine large enough to fund the build-out. Q2 confirmed the first two halves emphatically — Cloud revenue up 82%, Cloud operating income more than tripled, Search still growing 17%. It broke the third: the build-out now costs more than the cash engine produces, and Alphabet is issuing equity to close the gap.
No position change. But the reason I own GOOGL has shifted from “self-funding compounder” toward “capital-intensive AI infrastructure with a great ad business attached,” which is a different risk profile, and closer to names I already own.
Risks to this position
- Capital intensity: $195–205 billion of 2026 capex against no revenue guidance; returns on that spend are not yet visible outside Cloud.
- Dilution and funding: $49.6 billion of equity and an up-to-$40 billion at-the-market program replace buybacks, reversing years of share-count shrinkage.
- Earnings quality: reported EPS is now dominated by mark-to-market gains on private stakes, which can reverse.
- Concentration: this pushes GOOGL closer to the AI-infrastructure theme that already makes up most of this book, on the Thematic Exposure page.
Sources & references
- Alphabet Announces Second Quarter 2026 Results, July 22, 2026 (earnings release)
- Alphabet Q2 earnings call highlights — Yahoo Finance (capex outlook and CFO remarks)
- Earnings call transcript — Investing.com (consensus)
- Market reaction: July 23 News writeup
- Price data: Massive Market Data daily closes