Strong earnings beat + explosive cloud growth—why is Google still falling?

Author: Chasing the Wind Trading Desk

Alphabet, Google's parent company, reported an impressive second-quarter performance, with cloud business growth far exceeding expectations and both total revenue and earnings per share significantly beating Wall Street forecasts. Nevertheless, the stock price plunged sharply, reflecting market concerns over rapidly escalating capital expenditures, negative free cash flow, and equity dilution.

According to a Bank of America Securities research report, Alphabet's second-quarter net revenue reached USD 103.6 billion, surpassing the market expectation of USD 101.1 billion. Google Cloud revenue grew 82% year-over-year, substantially outpacing the anticipated 65%, highlighting particularly strong momentum.

Meanwhile, the company raised its fiscal year 2026 capital expenditure guidance by USD 15 billion, to a range of USD 195–205 billion, a significant increase from the previous guidance of USD 180–190 billion. This announcement became the key factor weighing on the stock price.

Bank of America Securities analyst Justin Post maintained a 'Buy' rating on Alphabet with a price target of USD 430. He noted thatdespite the negative market reaction to the increased capital spending, the cloud business’s growing backlog, customer overages, and continued expansion in cloud margins all indicate that incremental investments are directly translating into revenue growth.

In pre-market trading, Google shares extended losses to nearly 5%.

Google Cloud delivered an acceleration in growth this quarter that captured significant market attention.

Cloud revenue reached USD 24.8 billion in the second quarter, up 82% year-over-year—substantially exceeding the market’s expectation of 65% and representing a 19-percentage-point increase from the 63% growth recorded in the first quarter. Cloud operating margin rose to 35.6%, also ahead of the market’s forecast of 31.3%, up 270 basis points sequentially and nearly 15 percentage points higher than the same period last year.

According to a research report from Bank of America Securities,, the strong performance of the cloud segment is underpinned by multiple data points indicating its sustainability:Cloud backlog grew 11% quarter-over-quarter and approximately 375% year-over-year, reaching USD 514 billion; actual customer consumption exceeded contractual commitments by more than 50%, up from 45% in the first quarter; and the pace of new customer acquisition was more than double that of the same period last year.

Additionally, this quarter included new revenue from sales of TPU chips to external customers. Management stated that even excluding TPU sales, cloud revenue growth would still have 'accelerated significantly.'

Google’s model APIs currently process approximately 22 billion tokens per minute, a notable increase from 16 billion last quarter; weekly active users of its AI agent development platform, AntiGravity, have surpassed 2.4 million. Bank of America Securities expectsthat Google Cloud revenue growth will further accelerate to 93% in the third quarter.

Overall, Alphabet reported second-quarter GAAP earnings per share of USD 9.11, far surpassing the market’s expectation of USD 2.90. However, it should be noted that this figure includes approximately USD 98 billion in other income, primarily from a revaluation gain related to Anthropic—a figure the market had previously estimated at only USD 800 million. Excluding this one-time item provides a clearer view of core business performance.

Search revenue came in at USD 63.3 billion, up 17% year-over-year, broadly in line with market expectations but somewhat weaker than last quarter’s beat, which the market viewed as a near-term signal of a temporary 'cooling' in the AI-driven upside narrative.

Management also warned that the search business will face higher year-over-year base effects in the third quarter.

YouTube ad revenue reached USD 11.1 billion, up 13% year-over-year and exceeding market expectations of USD 10.8 billion, partly benefiting from brand advertising demand driven by the FIFA World Cup. On operating margins, GAAP operating margin for the second quarter was 39.3%, below the expected 40.3%, primarily dragged down by higher-than-expected G&A expenses—actual G&A spending came in at USD 6.46 billion, significantly above the anticipated USD 5.1 billion. Management attributed this to certain legal and other matters but did not provide detailed disclosure.

The market’s negative reaction to this quarter’s results centers on the substantial increase in capital expenditures and its impact on cash flow.

Alphabet raised its fiscal 2026 capital expenditure guidance to USD 195–205 billion, an approximately 8% upward revision from its prior guidance and significantly above market expectations of USD 187 billion.Bank of America Securities now expects full-year free cash flow to be negative USD 16 billion in 2026, and similarly negative in 2027.

Meanwhile, Alphabet did not repurchase any shares in the second quarter and reported negative free cash flow of USD 5.9 billion. Following the completion of a USD 45 billion hybrid capital financing in June, the company plans to launch a USD 40 billion at-the-market (ATM) equity offering in the third quarter. Bank of America Securities estimates this will lead to a roughly 1% sequential increase in diluted shares outstanding in the second half of the year.

Bank of America Securities analyst Justin Post noted that while these factors create near-term pressure, the increase in capital expenditures is directly linked to the rapid growth in cloud backlog—backlog stood at USD 514 billion, far exceeding the incremental USD 15 billion in capital expenditures, supporting the logic that 'more capacity equals more sales.' He maintains his forecast for 2026 capital expenditures at approximately USD 200 billion and raised his 2027 estimate to around USD 300 billion, implying year-over-year growth of about 51%.

Bank of America Securities maintains a "Buy" rating on Alphabet with a $430 price target, based on 2027 adjusted GAAP earnings per share of $15.55 multiplied by a 27x P/E ratio, plus $11 per share in cash.

The report raises its 2026 net revenue forecast by 2% to $433.6 billion and EPS by 4% to $20.58; for 2027, it lifts net revenue by 3% to $552.8 billion and EPS by 2% to $15.01.

At the after-hours price of approximately $332, Alphabet trades at around 22x its 2027 GAAP EPS, in line with the company's 10-year historical average, though Bank of America Securities expects 2027 revenue growth to reach 27%, significantly above the 14% average from 2023 to 2025.

Based on sum-of-the-parts valuation, excluding assets such as YouTube, Cloud, Waymo, and cash, the implied valuation for Google's core Ads and Play businesses is only 13x their expected 2026 earnings, below the S&P 500’s 20x multiple.

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