Alphabet posts $112bn profit as cloud surges 82%, but record cash burn and $205bn capex plan rattle investors

Earnings beat driven by cloud and AI

Alphabet reported second-quarter revenue of $119.8 billion, up 24% from a year earlier and ahead of the $117.06 billion analysts expected. Net profit quadrupled to $112 billion, or $9.11 per share, though the figure included a $98 billion gain from the appreciation of stakes in other companies, the company said. Google Cloud revenue surged 82% to $24.8 billion, accelerating from 63% growth in the previous quarter and well above the 64% forecast. Operating income from the cloud unit more than tripled to $8.8 billion, with margins widening to about 36%. Advertising revenue, still the core business, rose 14% to $81.6 billion, helped by AI-powered search features that boosted query volumes and engagement.

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Capex hike and cash burn rattle investors

Despite the top-line beat, Alphabet's shares fell as much as 5% in after-hours trading after executives raised the full-year capital expenditure forecast to between $195 billion and $205 billion, up from a prior range of $180 billion to $190 billion. Quarterly capex roughly doubled from a year earlier to $44.9 billion, pushing free cash flow to negative $5.9 billion, the first quarterly outflow in nearly two decades. CFO Anat Ashkenazi said the increase was driven by accelerating deployment of capacity to meet surging demand, and that investments would "increase significantly in 2027" over 2026 levels. The spending is concentrated on data centres and AI infrastructure, including the company's own TPU chips.

The risk is tilted towards further increases, particularly while Microsoft and others remain capacity-constrained. But investors will increasingly focus on how much of that cash must be reinvested simply to remain competitive -- and whether AI revenue can grow faster than capital expenditure, depreciation and operating costs.

Cloud backlog offers counterargument

Google Cloud's contracted but not yet recognised revenue, or backlog, reached $514 billion, up from $490 billion in the prior quarter, according to Ashkenazi. Bulls point to the backlog as evidence that the capacity being built already has committed buyers, suggesting the spending will eventually convert to recognised revenue. Alphabet's cloud unit, the third-largest behind Amazon Web Services and Microsoft Azure, has been winning large deals with AI firms including Anthropic. The company's own AI model, Gemini, surpassed 950 million monthly active users, narrowing the gap with OpenAI's ChatGPT, which crossed 1 billion in June.

Competitive pressures and Gemini delays

While cloud growth impressed, Alphabet's own AI product roadmap has faced setbacks. The launch of its next flagship model, Gemini 3.5 Pro, originally planned for June, was delayed, leaving the company trailing in the AI coding tools market. Rivals Anthropic and OpenAI have consistently rolled out enterprise-focused upgrades, and Chinese open-source models have gained traction. Alphabet's search business, however, has been a bright spot, with AI Overviews and AI Mode drawing more advertising dollars and deeper user engagement. YouTube also benefited, with over 1.7 billion users watching videos related to the 2026 World Cup.

Market reaction and sector-wide concerns

Alphabet's results set a cautious tone for Big Tech earnings next week, when Microsoft, Meta and Amazon report. All three saw shares down 2% to 4% in pre-market trading on Thursday, with Alphabet leading the slide at 5%. Analysts expect Alphabet and Amazon to burn cash in 2026, while Meta's free cash flow is projected to shrink 95.7% to just $1.85 billion. Capex-to-revenue ratios are set to nearly double across the group: Meta to 54.9% from 35.9%, Alphabet to 41% from 23%, Microsoft to 45% from 31%, and Amazon to 25% from 18%. The sector's total AI-related spending is on track to exceed $700 billion this year, with Morgan Stanley estimating over $1 trillion next year. In June, Alphabet announced plans to raise up to $80 billion through share sales to fund AI efforts, with Berkshire Hathaway committing $10 billion.