Google Crushed Earnings, but Stock Tanks💎
What most investors get wrong about Google's Q2 results
Google is one of the best businesses in the history of the markets.
And their Q2 2026 report just confirms how good the business is, and how it keeps growing at unprecedented levels, even at its scale.
Just look at these numbers, the total revenues were up +24%, with a 17% increase in Search revenue, and 82% (!) increase in Google Cloud (With an insane, $514 billion backlog), and a +13% increase in YouTube Ads revenue.
The story of the quarter is the incredible growth of Google Cloud, but before we get into that, lets look at the other business segments.
Google Services ($94.5 billion, +15%)
Consisting of Search that grew 17% to $63.3 billion, YouTube ads that grew 13%, to $11.1 billion, Google Network that contracted by 1%, and Subscriptions that grew 15% to $12.9 billion.
Search and Subscriptions posted a strong quarter, but we see YouTube ads and Google Network struggle more. Of course this is all overshadowed by Cloud and CapEx this quarter, but something I’m keeping an eye on moving forward.
This was said about the Subscriptions segment on the earnings call on what drove the growth:
“Due to strong growth in both YouTube subscriptions... and Google One, which was driven by demand for AI plans”
A top line growth of +15% with expanding operating margins from 40.1% to 41.8% is an excellent quarter in my book.
Google Cloud growing +82% YoY
Now, lets get into the headline story of the quarter.
Cloud is firing on all cylinders.
Not only is demand high, but this is the first quarter where Alphabet recognized revenue from TPU system sales delivered to data centres.
This is interesting, because it works as a second growth leg for Google Cloud, here is what management had to say about it:
“…we continue to expect to recognize a relatively small portion of the revenues from our existing TPU system sales agreements this year, ramping as we exit 2026... the vast majority of the revenues from these agreements will be realized in 2027.”
The TPU sales will hit the P&L in 2027, which is very interesting and could be a huge growth driver for Alphabet.
However, this is unrealized and in the future. What is true right now, is that Cloud just posted its best quarter ever.
Revenues almost doubled from $13.6 billion to $24.7 billion. Operating margins expanded significantly from 20.7% in Q2 25 to 35.5% in Q2 26 (Just insane).
When I first saw these numbers, I thought it was a blowout quarter, and that the stock price would boast upwards.
But of course, there is more to the story that concerned analysts and investors.
Anat, Alphabet’s CFO, was direct on the earnings call about Cloud margin risks:
“Given the supply-constrained environment, we plan to expand the use of third-party capacity in Q3 as a bridging strategy... it will create modest margin pressure in the near term.”
What I’m reading from this, is that the strong Q2 margins is a high mark, and not necessarily the baseline.
Alphabet will be renting outside compute to keep serving demand it can’t (yet) fill internally.
This is how Sundar looks at this strategic move:
“a short-term cost over a few months may be very high, in the lifetime of the deal... highly ROI positive.”
This is a classic short-term pain for long-term gain play, but the market will always punish a business for this, as the long-term gain is uncertain.
Capital Expenditure reached $44.9 billion
Another reason why the market is a bit shaky in Alphabet (And the rest of the hyperscalers), is their insane CapEx plans.
The prevailing question is: Will these hundreds of billions yield a good return on investment?
The management team expressed a growing confidence in the investments:
“I think the dynamics look healthier than where we were about a year ago, that’s what gives us the confidence to undertake those investments.”
What I think is interesting is the added commentary on the backlog:
”we expect to recognize just over 50% of the total backlog as revenue over the next 24 months”
This basically gives us a sanity-check on the CapEx, because we can easily follow this statement up in the coming earnings report to see if Alphabet manages to do practice what they preach.
Earnings goes parabolic (+298% YoY)
Another story worth mentioning is one that many investors get wrong.
I’ve seen multiple investors claim that Alphabet is severely overvalued, and point to the earnings bloating from the most recent quarter.
It is true that the earnings is bloated this quarter, this is because Alphabet got $97.9 billion of its Net income from “Other income (expense), net” this quarter.
Why is that? Well, Alphabet owns between 4% and 6% of SpaceX. It paid $900 million for a 7.5% stake of SpaceX in 2015 (Which has since been diluted).
SpaceX went public this quarter, and much of the gains were realized in the income statement of Alphabet. Most of the $97.9 billion is from this increase in marketable securities.
So, not from Alphabets operations, but from an (incredibly good) investment they’ve made.
This is understood by serious investors, and we should not use the headline numbers to base our valuation on.
Even if you exclude the earnings from investment gains, this was a great quarter.
Income from operations grew from $31 billion to $40.7 billion (+30.3% YoY). A great result from Alphabet which reflects the business growth.
Negative Free Cash Flows
My final point will be on FCF.
Alphabet has been a cash generating machines for decades.
However, it has taken a deliberate choice to suppress FCF to invest heavily in infrastructure to support its next leg of growth.
You can disagree with the market on punishing GOOGL 0.00%↑ stock for making this move, but the market does what it always do. It discounts risk.
There is a lot of uncertainty in the investments Alphabet is making, even if it makes logical sense, it is still unproven.
When (or if) Alphabet starts posting fantastic results (In terms of growth and market share), the stock price will follow. But until that proof is here, the market remains cautious.
Despite this, if we just look at the operations, Alphabet’s Net cash provided by operating activities increased 41% YoY.
However, the Free Cash Flow went negative (-$5.855 billion) in Q2, due to a heavy $44.9 billion CapEx investment.
Conclusion
A record breaking quarter for Alphabet, especially from the Google Cloud business segment.
Search and subscriptions are also holding up well and continue to grow rapidly, even at its massive scale (Remember a few years ago, when Search was deemed dead?).
The fantastic operational results were overshadowed by a more cautious market, looking at:
Margin risk from Cloud (Due to borrowed capacity - remember, short-term pain, long-term gain).
Capital expenditure uncertainty. Burning $44.9 billion in one quarter is no joke, and the market has not yet decided if this is a good investment.
Negative free cash flows. It is deliberate, but it’s never a positive to see a cash generator post negative FCF numbers.
In addition, the incredible SpaceX investment has bloated the Net Income and EPS numbers. The result from this is that if we look at the current PE, it is 16.4x. This is of course without excluding the one-time effect from Alphabet’s equity investments.
The forward PE of 24.5x is more accurate to use, and it is still in line with its 10 year median forward PE:
That’s it for today! Leave your thoughts in the comments below, or reply to this email.
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