Alphabet (NASDAQ:GOOGL) $US342.09

Alphabet (GOOGL) delivered a strong second-quarter result, with revenue and earnings ahead of expectations and Google Cloud the clear standout. However, the shares fell around ~5% after hours as investors focused on another sharp increase in capital expenditure and the likelihood that AI-related spending will remain elevated.

Revenue increased 24% to US$119.8 billion, while revenue excluding traffic-acquisition costs rose 27% to US$103.6 billion, ahead of consensus. Operating income increased 30% to US$40.8 billion, with the group operating margin improving to 34%.

Second-quarter highlights:

• Revenue of US$119.8 billion, up 24%.
• Google advertising revenue of US$81.6 billion, up 14%.
• Search revenue of US$63.3 billion, up 17%.
• YouTube advertising revenue of US$11.1 billion, up 13%.
• Google Cloud revenue of US$24.8 billion, up 82%.
• Google Cloud operating income of US$8.81 billion, well ahead of expectations.
• Capital expenditure of US$44.9 billion, roughly double the prior year.

Google Cloud was the standout, with revenue growth accelerating to 82% (vs +63% expected) as demand strengthened across enterprise AI infrastructure, AI solutions and core cloud services. Cloud operating margins reached a record 36%, demonstrating that Alphabet is converting its AI investment into meaningful earnings growth rather than simply chasing revenue.

The core advertising businesses were also healthy. Search revenue grew 17%, supported by AI features driving higher query volumes, while YouTube advertising came in ahead of expectations. Gemini now has 950 million monthly active users and processes 22 billion API tokens per minute, highlighting the scale at which Alphabet is deploying AI across its ecosystem.

The issue remains spending. Capital expenditure reached US$44.9 billion during the quarter, up from US$22.5 billion a year earlier, and the outlook implied that investment could remain higher than the market had expected. While Alphabet’s custom silicon and improving Cloud profitability provide some justification, the level of expenditure continues to constrain free cash flow and raises the execution bar.

No doubt, this was a strong result beneath the headline share-price reaction. Cloud growth and margins were exceptional, while Search and YouTube remained resilient despite concerns that generative AI would weaken Google’s core advertising franchise. The market’s focus on capex is understandable, but Alphabet is also showing better returns on that investment than many peers. We like the stock, have held it in the past, but currently have no position.