Alphabet’s 2026 Q2 earnings report landed above expectations on revenue, cloud and advertising, but investors zeroed in on a different part of the release: cash flow. Google Cloud once again grew faster than even the most optimistic buy-side estimates, and the company raised its capital spending plan for the year while signaling another meaningful increase in 2027. The trade-off was immediate. Free cash flow turned negative, core EPS missed consensus after stripping out investment gains, and Alphabet shares fell about 3% in after-hours trading.
Revenue beat estimates, while core EPS trailed consensus
Alphabet posted Q2 revenue of $119.8 billion, up 24% from a year earlier and above the $116.96 billion consensus estimate.
Net income rose 297.6% year over year to $112.1 billion, and EPS came in at $9.11. But those headline profit figures were heavily influenced by investment gains. According to the company, unrealized net gains tied to higher valuations of equity investments contributed $77.1 billion to net income. Excluding other gains, EPS was about $2.85, below the $2.95 consensus estimate.
That leaves operating profit, cloud growth and cash flow as the cleaner read-through for the underlying business. The jump in net income and GAAP EPS did not come mainly from core operations.
Google Cloud topped even the bullish view, though backlog growth slowed sequentially
Google Cloud revenue reached $24.77 billion in the quarter, up 81.8% year over year. That was faster than Q1’s 63.4% growth, well ahead of the 64.3% consensus forecast, and above the 75% buy-side bull case cited in the report.
Cloud backlog rose 11.7% from the prior quarter to $514 billion, an increase of roughly $54 billion in a single quarter. The company tied that expansion mainly to enterprise AI product demand and TPU orders, with more than half of the backlog expected to be recognized as revenue over the next 24 months.
The pace of backlog additions, however, slowed noticeably from earlier periods. Whether Cloud can hold its current growth rate will depend on the size of new contracts, the speed of compute delivery and the timing of TPU revenue recognition.
Gemini Enterprise has become an important growth driver for Cloud, with nearly 90% of Fortune 100 companies now using it. Customer model calls processed via API climbed to more than 22 billion tokens per minute, up 37.5% from 16 billion in the previous quarter, a sign that enterprise AI demand is still expanding quickly.
Advertising came in broadly in line to slightly ahead
Alphabet’s advertising business was steady overall, with most key lines landing at or modestly above market expectations.
- Total advertising revenue was $81.63 billion, up 14.4% year over year, versus market expectations of $81.1 billion.
- Search revenue was $63.27 billion, up 16.8%, essentially in line with the $63.3 billion market estimate, though slower than Q1’s 19.1% growth.
- YouTube advertising revenue was $11.06 billion, up 12.9%, above the $10.8 billion estimate.
- Google Network revenue was $7.3 billion, down 0.7% from a year earlier, but still slightly ahead of the $7.13 billion expected.
Capex guidance moved higher again, and free cash flow turned negative
The largest source of investor concern was the spending profile. Q2 capex climbed to $44.92 billion, up 100.5% from a year earlier and 25.9% from the prior quarter.
Alphabet lifted its 2026 capital expenditure guidance to $195 billion-$205 billion from $180 billion-$190 billion, raising both the low and high end by $15 billion. It also said capex would continue to increase meaningfully in 2027.
The higher outlay reflects continued demand tied to Google Cloud, Gemini training and TPUs, while supply constraints in compute remain in place. In the report’s framing, that supports medium- to long-term demand visibility for AI accelerators, storage, servers, optical networking and data center buildouts.
The cost of that buildout is already visible in the cash flow statement. Free cash flow fell from $10.12 billion in the previous quarter to negative $5.86 billion in Q2, with capex exceeding operating cash flow for the first time. As depreciation, energy expense and data center operating costs flow through the income statement, the market is likely to judge Alphabet more heavily on how quickly AI spending converts into revenue and what return it earns on that capital.
Management said compute remains tight, with TPU revenue mostly landing in 2027
On the earnings call, management said the company is still severely constrained on compute capacity. In Q3, Alphabet plans to temporarily expand its use of third-party rented compute to avoid losing large customers because of short-term supply shortages.
That rented capacity is more expensive, and management said it is expected to pressure Cloud margins. The company’s view is that the higher near-term cost helps preserve the long-term value of customer contracts.
Alphabet also said it delivered TPU systems to customers and recognized related revenue for the first time this quarter. Only a small amount of TPU revenue will be recognized in 2026, while the vast majority of revenue tied to existing TPU contracts is expected in 2027. As TPU moves from internal infrastructure into external system sales, it expands Google Cloud’s addressable market and improves visibility for upstream demand tied to advanced process nodes, HBM, servers and networking equipment.
Gemini 4 still has to prove itself
Management said Google has begun the largest-scale pre-training run yet for Gemini 4 as it tries to regain leadership in the next generation of frontier models.
At the same time, executives acknowledged that the current model still needs work in coding and agentic programming. With no clear release date, no disclosed performance data and no detailed commercialization path yet for Gemini 4, the earnings call did not fully ease concerns about Google’s model competitiveness.
The report points to continued strength in enterprise AI demand, and it shows Google Cloud converting AI investment into growth at a faster pace. The after-hours decline suggests the bar has moved. Cloud outperformance remains a positive, but negative free cash flow, rising capex and uncertainty around Gemini’s frontier capabilities are set to shape the next phase of Alphabet’s valuation debate.