Google’s latest quarterly results pointed to stronger AI monetization and another step-up in infrastructure spending, with JPMorgan saying the company’s AI investment cycle has shifted from a cash-burning phase to a period of revenue payback.
The bank kept its Overweight rating on Google and reiterated a $420 price target, based on 25x its 2028 GAAP earnings per share estimate of $16.66. JPMorgan said any market sell-off tied to concerns over the scale of capital expenditures could offer an entry point.
Cloud growth accelerates and TPU revenue clears $1 billion
Google Cloud generated $24.77 billion in revenue in the second quarter, up 82% from a year earlier. Backlog reached $514 billion at the end of the period, up $52 billion sequentially, with about 50% expected to be recognized as revenue over the next 24 months.
New customer additions doubled year over year, while existing customers consumed more than 50% above their committed usage levels. Gemini API throughput rose from about 16 billion tokens per minute in the first quarter to 22 billion tokens per minute in the second quarter, a 37.5% sequential increase. Around 90% of Fortune 100 companies have adopted Gemini Enterprise, and monthly active developers topped 9 million.
TPU revenue was recognized separately for the first time in the second quarter. JPMorgan estimated that quarterly TPU revenue exceeded $1 billion. The report said Google uses a direct sales model rather than a licensing structure, which means revenue is recorded on a gross basis. Most TPU orders are already included in backlog, with deliveries expected to be concentrated in 2027, while TPU revenue should continue to build through 2026.
Search stays resilient despite earlier AI traffic concerns
Investors had worried that AI products could divert traffic away from Google Search, but second-quarter figures pointed the other way. Search and other revenue rose 17% year over year, with positive contributions from major verticals including retail, finance, and technology.
Google said monthly active users for its AI features exceeded 1 billion, helping generate incremental search queries. AI optimization improved shopping ad relevance by 20%, and about 500,000 advertisers have adopted AI Max tools, driving billions of additional monetizable queries. YouTube advertising revenue rose 13% from a year earlier, supported by both brand and performance advertising, with FIFA World Cup-related ad spending also contributing.
2026 capex guidance moves higher again
Google raised its 2026 capital expenditure guidance to $195 billion to $205 billion from its previous $180 billion to $190 billion range, an increase of roughly $15 billion. The company also said 2027 capex will continue to grow materially.
JPMorgan said the higher spending plan reflects faster compute delivery to meet strong customer demand, not upstream cost pressure. The bank lifted its 2027 capex forecast to $378 billion, which would represent 85% year-over-year growth.
To support spending, Google completed about $20 billion in debt issuance and $85 billion in equity financing during the second quarter. Management said it has no current plan to return to the equity market and expects future funding to come mainly from operating cash flow plus additional debt issuance, while preserving balance sheet health.
Margin pressure seen as temporary
Google posted a 34.0% operating margin in the second quarter, slightly below JPMorgan’s 34.4% estimate. According to the bank, the shortfall was driven by one-off or transitional items rather than a structural deterioration in profitability.
Those factors included third-party compute rentals used to bridge gaps in in-house capacity, lower hardware margins from TPU sales compared with software, Wiz integration costs, accelerated depreciation, and legal expenses. JPMorgan said margins should recover steadily as in-house capacity ramps and TPU revenue gains scale.
JPMorgan says the market may still be using an outdated framework
In JPMorgan’s view, the key signal from the quarter is that Google’s AI investment is now translating into revenue more quickly than the market expected. Cloud growth kept accelerating, TPU revenue emerged as a standalone contributor, and search continued to expand instead of weakening under AI competition.
The bank argued that investors are still judging Google through a traditional capex-and-margin lens. In this case, it said, capex increases are being pulled by demand, while margin pressure is largely a transition effect. If the market continues to price the stock under that older framework, JPMorgan said, weakness could create a buy-the-dip opportunity.
It also highlighted Google’s financing mix in the quarter — $20 billion in debt plus $85 billion in equity financing — as a sign that management is willing to fund higher investment without putting excessive strain on the balance sheet. JPMorgan described the equity raise as unusual for a large technology company but said it sees the move as a one-time action rather than the start of a recurring funding strategy.