Alphabet’s Q2 Earnings: A Mixed Bag

Alphabet, the parent company of Google, recently released its Q2 2026 earnings, which showed a mixed bag of results. While the company beat expectations on the top line, it missed on the bottom line. The stock is currently trading lower as investors worry about the company’s growing capex to build artificial intelligence (AI) infrastructure.

Alphabet’s cloud revenues have been growing much faster than those of its rivals, Amazon and Microsoft. The company’s cloud order backlog, which includes chips, rose by over $50 billion compared to Q1 and surpassed $500 billion. The stellar growth in cloud revenues was, however, dampened by two factors: margin pressure in the near term due to the use of third-party compute capacity and a higher capex budget.

AI Ambitions: What’s Next?

Alphabet is getting quite aggressive with AI capex, and the management’s tone suggests that the budget might only be higher than this year. The company is particularly optimistic about Gemini 4, with CEO Sundar Pichai terming it as ‘ambitious’ thrice during the Q2 earnings call. ‘We wanted to compete at the frontier level of where the frontier will be when Gemini 4 comes out. And so, we are applying a lot of our compute and effort in that direction,’ said the Alphabet CEO.

The company is using third-party compute capacity to make up for the demand-supply mismatch, which will lead to margin pressure in the near term. However, Alphabet has several growth levers, like tensor processing units (TPUs), which should keep its topline growth healthy over the near foreseeable future. The company started delivering TPUs to customer data centers in Q2, and while it does not provide the order backlog (which is part of the overall cloud backlog), the company expects the ‘vast majority’ of revenues from its existing agreements to be realized next year.

Valuations and the Stock’s Future

Thanks to the drawdown in GOOGL stock from its 2026 highs, its valuations have also corrected, and the stock now trades at a forward price-to-earnings (P/E) multiple of 24.5x. I believe GOOGL’s near-term risk-reward should start getting a lot more favorable as the stock dips closer to $300 in the post-earnings meltdown, at which point I would aggressively add more shares to my existing holdings.

Alphabet has emerged as an AI winner, and the company has successfully allayed fears of it losing its turf in search to AI upstarts. The company’s cloud revenues have been growing much faster than those of its rivals, and the company has several growth levers, like TPUs, which should keep its topline growth healthy over the near foreseeable future.

While investors were willing to overlook the capex hike announced during the Q1 earnings call and sent the stock soaring nearly 10%, this time around they are not as forgiving, and the stock is trading by almost the same amount in the opposite direction despite the mammoth growth in cloud revenues.