Second-quarter revenue rose 23%, ignoring currency moves, to $119.8bn ($116.9bn expected). The core advertising business, which includes Google Search and YouTube, saw revenue rise by 15% to $81.6bn. Google Cloud revenue increased by 82% to $24.8bn.
Operating income rose 30% to $40.8bn ($40.4bn expected), supported by strong growth across Google Services and a significant improvement in Google Cloud profitability.
Free cash flow turned negative at $5.9bn, as higher capital expenditure more than offset stronger operating cash generation. Net cash, including leases, was $129.7bn at quarter-end, boosted by the receipt of $49.6bn for the issue of new shares.
Capital expenditure guidance for 2026 has been increased to between $195-205bn (previously $180-190bn).
The shares were down 2.9% in after-hours trading.
Our view
Alphabet’s latest quarter marks an important shift, even if the market’s poor reaction showed investors remain uneasy about the rising cost of it. Search remains the key profit engine, but Cloud has overtaken it as Alphabet’s largest source of new revenue growth. Together, these make up the core pillars of the investment case.
Search revenue remains strong, further weakening the argument that AI chat tools are hollowing out Google’s core business. New AI features are driving search activity, while the cost of producing AI Mode responses has fallen to its lowest level since launch. The competitive threat hasn’t disappeared, and tougher comparisons could start to slow reported growth, but Alphabet is showing it can change how people search without damaging its ability to make money.
Cloud is now the clearest growth engine, with an impressive backlog standing at $514bn. Demand for AI computing capacity remains greater than Alphabet can currently supply, and bringing new infrastructure online should support further growth. Cloud margins reached nearly 36%, offering tangible evidence of attractive returns, although greater use of more expensive third-party capacity could put some near-term pressure on profitability.
That evidence matters because Alphabet is undergoing a major capital allocation reset. This year’s capital expenditure guidance has risen to $195-205bn, buybacks have been paused, and external funding has increased. The capital-light model of old is becoming more infrastructure-heavy, with big implications.
For the first time ever, quarterly free cash flow turned negative. But this isn’t a sign of financial strain. Operating cash flow continues to rise, and the balance sheet has ample capacity. Alphabet is raising and reinvesting capital from a position of strength, giving it room to build ahead of demand. The tougher question is whether future returns justify an investment bill that shows little sign of easing.
Alphabet also has more ways to win. Its custom chips can lower the cost of running AI, while Search, YouTube, Android and other consumer products offer huge distribution. But leadership can’t be taken for granted. Delays around advanced Gemini models have raised questions over frontier performance, and Alphabet must balance capacity between defending Search, serving developers and meeting enterprise demand.
Alphabet’s control of the AI stack, from cloud and search to chips and models, is a competitive advantage, while spending concerns have pulled its price-to-earnings multiple down to a more attractive level. Our main caution is on short-term sentiment, which could remain under pressure as investors adjust to this new capital profile.
Environmental, social and governance (ESG) risk
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, Alphabet’s overall management of material ESG issues is strong.
Monopoly and market dominance concerns are a key regulatory risk. It remains the subject of antitrust investigations in several countries, leading to calls from both EU and US regulators for the breakup of its online advertising business. Alphabet’s management of data handling is strong, aided by its deep pockets. But this remains a key risk to monitor in the evolving landscape of AI.
Alphabet key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.