Google's earnings confirm AI demand: Strong compute demand continues, and high investments enter the return validation phase

I. Key Financial Highlights: All Metrics Beat Expectations

Alphabet Inc. $Alphabet-A (GOOGL.US)$ released its Q2 FY2026 earnings report after market close on July 22, 2026. For the reporting period, the company generated revenue of $119.796 billion, up 24% year-over-year, marking its 12th consecutive quarter of double-digit growth and exceeding the consensus market expectation of approximately $117 billion by roughly 2.4%. Operating profit reached $40.77 billion, a 30% year-over-year increase, resulting in an operating margin of 34%, up approximately 2 percentage points from the prior year. Net income attributable to common shareholders surged 298% year-over-year to $112.107 billion, primarily driven by a significant increase in unrealized gains on equity securities during the period (other income amounted to $97.98 billion).

By segment, Google Cloud reported revenue of $24.768 billion, up 82% year-over-year—significantly ahead of the market expectation of $22.46 billion—and achieved its highest growth rate in recent years. Google Cloud’s operating profit reached $8.814 billion, more than triple the $2.826 billion recorded in the same period last year, with operating margin improving from 20.8% to 35.6%. The strong revenue growth was primarily driven by robust demand for Google Cloud Platform (GCP) enterprise AI solutions, AI infrastructure compute services, and core cloud offerings.

(Source: Alphabet Q2 FY2026 Earnings Report; Bloomberg, data as of June 30, 2026)

II. Capital Expenditure Remains Elevated, Backlog Surpasses $500 Billion for the First Time

Capital expenditures for the second quarter amounted to $44.924 billion, an increase of approximately 101% year-over-year, exceeding market expectations of $44.15 billion. CFO Anat Ashkenazi stated during the earnings call that the vast majority of capital expenditures were allocated to technical infrastructure supporting AI development, with roughly 60% directed toward servers and about 40% toward data centers and networking equipment.

Google Cloud’s contract liabilities (i.e., revenue from signed contracts not yet recognized, or backlog) rose to $514 billion, marking the first time this metric has surpassed the $500 billion threshold and representing a further sequential increase from the prior quarter. The continued accumulation of backlog indicates that AI investments are accelerating into more certain medium-term commercial returns.

Free cash flow for the quarter came in at -$5.855 billion, marking Alphabet’s first-ever quarterly negative free cash flow since its IPO in 2004.

(Source: Alphabet Q2 FY2026 Earnings Report and Earnings Call, data as of June 30, 2026)

III. AI Application Ecosystem Expands Rapidly

The Gemini app reached 950 million monthly active users, surpassing prior market estimates of 920 million. Nearly 90% of Fortune 100 companies have already deployed Gemini Enterprise services; the Gemini model API currently processes approximately 22 billion tokens per minute. The company has initiated pre-training for its next-generation model, Gemini 4.

CEO Sundar Pichai stated in the earnings release: "Our investments in AI are fundamentally reshaping the boundaries of what’s possible across all our businesses."

(Source: Alphabet Q2 FY2026 Earnings Call, July 22, 2026)

IV. Capital expenditure guidance continues to be revised upward, with the AI investment cycle remaining expansive

In February 2026, the company initially provided full-year capital expenditure guidance of $175–$185 billion; during its Q1 earnings call in April 2026, it raised this to $180–$190 billion; and in the latest Q2 earnings report, it further increased guidance to $195–$205 billion—significantly above the Bloomberg consensus analyst estimate of approximately $186 billion. Management explicitly stated in its guidance that capital expenditures will continue to see 'significant growth' in fiscal year 2027.

During the earnings call, Ashkenazi stated, 'Over the past three years, the company has significantly expanded its compute capacity, yet actual demand has consistently outpaced deployed capacity. We remain in a supply-constrained environment, with strong demand from both external cloud customers and internal business needs.' Management also emphasized that capital expenditure expansion will remain sustainable as long as expected returns remain attractive.

To support its AI infrastructure investments, the company completed a $49.6 billion equity offering in June 2026 and simultaneously issued $20.3 billion in senior unsecured notes.

(Source: Alphabet’s quarterly earnings reports and guidance; Bloomberg, data as of July 2026)

V. Market Reaction: Divergence in pricing dynamics between the supply chain and cloud providers

Following the earnings release, Alphabet Class A shares fell as much as 5% in after-hours trading, ultimately closing down 3.31%. The market’s primary valuation concern centered on the company’s free cash flow turning negative for the first time, highlighting growing tension between heavy AI infrastructure investment and near-term cash returns.

In contrast, the compute hardware supply chain received clear positive catalysts. NVIDIA $NVIDIA (NVDA.US)$ , Broadcom $Broadcom (AVGO.US)$ , Micron $Micron Technology (MU.US)$ and Lumentum $Lumentum (LITE.US)$ Chip and optical communication companies saw their after-hours share prices strengthen—market participants viewed Google's continued investment in AI infrastructure as reaffirmation of the AI hardware supply chain's robust outlook.

During the early Asian trading session on July 23, 2026, South Korea's KOSPI index surged sharply, briefly gaining over 3% intraday to reclaim the 7,000-point mark. SK Hynix $SK hynix (SKHY.US)$ rose nearly 5% in early trading, while Samsung Electronics $Samsung Electronics (005930.KR)$ gained more than 3%. Active short-covering demand in memory chips and the AI supply chain continues to drive a re-rating of Asia’s semiconductor manufacturing hub.

(Source: Bloomberg, Oriental Wealth Research Center; data as of July 23, 2026)

VI. Investment Tools: Accessing the Global AI Supply Chain

E Fund (Hong Kong) FTSE Artificial Intelligence Select Index ETF (3489.HK)$E Fund (HK) FTSE AI Select Index ETF (03489.HK)$ tracks the FTSE Custom Global Artificial Intelligence Select Index. The index selects 50 companies listed in Hong Kong and the U.S. whose core businesses focus on AI computing power, algorithms, data, and applications, using a free-float market capitalization weighting adjusted by a growth factor. Its top 10 constituents include global computing infrastructure leaders such as NVIDIA, Broadcom, and Micron Technology, along with $Microsoft (MSFT.US)$ core cloud services and AI application players like Microsoft and Google, offering comprehensive exposure across the entire AI value chain—from foundational computing infrastructure to real-world AI applications—through a single product.

E Fund (Hong Kong) Solactive Asia Semiconductor Select Index ETF (3486.HK) $EFund A SEMICON ETF (03486.HK)$ Listed on the Hong Kong Exchange on March 26, 2026, tracking the Solactive Asia Semiconductor Select Index. The index selects 30 constituent stocks from semiconductor companies listed on exchanges in Hong Kong, Japan, and South Korea, as well as U.S.-listed firms headquartered in Taiwan, covering core segments of the semiconductor industry including chip design, wafer fabrication, packaging & testing, and equipment & materials. Index constituents include SK Hynix and Huahong Hongli. $HUA HONG GRACE (01347.HK)$ , Taiwan Semiconductor $Taiwan Semiconductor (TSM.US)$ , SMIC $SMIC (00981.HK)$ and ASMPT. Over 75% of global chip manufacturing capacity is concentrated in Asia, and this ETF offers an efficient tool for one-click exposure to the entire Asian semiconductor value chain.

(Source: FTSE, Solactive, data as of July 2026; chip capacity data from Moody's Investors Service, 2025)

E Fund (Hong Kong) AI ETF (3489.HK) and E Fund (Hong Kong) Solactive Asia Semiconductor Select Index ETF (3486.HK) adopt differentiated positioning: 3489 provides exposure to the global AI value chain (computing power + models + applications) across both Hong Kong and U.S. equity markets, while 3486 focuses specifically on core hardware segments such as semiconductor manufacturing and equipment in Asia, targeting the foundational computing infrastructure underpinning AI. Allocating to both products together enables comprehensive coverage of the investment chain—from chip manufacturing to AI application deployment.

7. Investment Perspective: Focus on Long-Term Fundamentals and View Short-Term Volatility Rationally

The key industry signal from Google’s latest earnings report is that hyperscale cloud providers continue to raise their capital expenditure guidance, accelerating demand transmission and delivery pressure upstream to GPU, HBM, advanced packaging, and foundry segments. The strong outlook for HBM and data center memory at memory leaders like SK Hynix has been further validated by fundamentals, further alleviating prior market concerns about 'peak AI demand.' As the global hub for semiconductor manufacturing capacity, Asia’s fabrication and equipment segments will continue benefiting from the current AI infrastructure investment cycle.

The market currently reflects two parallel pricing logics: hardware supply chains are trading based on confirmed capital expenditure-driven demand, while cloud service providers are undergoing valuation reassessments based on free cash flow and return cycles. For upstream computing hardware, Google’s increased investments in data centers, AI servers, and custom chips (ASICs) serve as direct evidence that demand for computing infrastructure remains intact, helping to ease fears of a 'peak semiconductor cycle.'

The AI industry is at a critical inflection point, transitioning from 'technological breakthroughs' to 'commercial implementation.' Semiconductors, as the foundational asset class of the AI era, continue to see expanding demand for computing power. AI investment focus has broadened beyond GPU procurement alone to encompass data centers, power infrastructure, networking equipment, and storage systems—widening the range of beneficiaries across the value chain. Sub-sectors such as memory chips, advanced nodes, semiconductor equipment, and materials continue to experience robust demand growth, and the tight supply-demand balance is unlikely to reverse in the near term.

Investors should anchor their decisions in long-term industry trends and closely monitor substantive changes in company fundamentals and sector sentiment, avoiding irrational decisions driven by short-term market noise. As quintessential growth assets, semiconductors and AI naturally exhibit cyclical volatility. Against the backdrop of persistently stronger-than-expected global AI computing demand and continuously rising capex guidance from leading cloud vendors, the long-term strategic value of Asia as the semiconductor manufacturing hub continues to be validated. Index-based allocation via a diversified basket of manufacturing and equipment names offers superior portfolio-level risk diversification compared to holding individual stocks.

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E Fund (Hong Kong) Solactive Asia Semiconductor Select Index ETF (the 'Sub-Fund') is a sub-fund of E Fund ETF Trust. E Fund ETF Trust is an umbrella unit trust established under Hong Kong law. The Sub-Fund is a passively managed ETF as defined under Chapter 8.6 of the 'Code on Unit Trusts and Mutual Funds' issued by the Securities and Futures Commission ('SFC'). Units of the Sub-Fund ('Units') are traded on The Stock Exchange of Hong Kong Limited ('HKEX') like stocks. The investment objective is to provide investment returns that closely track the performance of the Solactive Asia Semiconductor Select Index ('Index'), before fees and expenses. As the Sub-Fund’s investments are concentrated in securities of companies primarily engaged in the semiconductor sector in Hong Kong and East Asia, it may be particularly subject to certain specific factors, and thus is exposed to sector and geographic concentration risks. Consequently, its net asset value may exhibit greater volatility compared to more broadly based funds.

E Fund (Hong Kong) FTSE Artificial Intelligence Select Index ETF (the 'Sub-Fund') is a sub-fund of E Fund ETF Trust. E Fund ETF Trust is an umbrella unit trust established under Hong Kong law. The Sub-Fund is a passively managed ETF as defined under Chapter 8.6 of the 'Code on Unit Trusts and Mutual Funds' issued by the Securities and Futures Commission ('SFC'). Units of the Sub-Fund ('Units') are traded on The Stock Exchange of Hong Kong Limited ('HKEX') like stocks. The investment objective is to provide investment returns that closely track the performance of the FTSE Custom Global Artificial Intelligence Select Index ('Index'), before fees and expenses. The constituents of the Index (and therefore the Sub-Fund’s investment targets) may be concentrated in the technology sector and two geographic regions/countries (China and the United States). Compared to funds with more diversified portfolios, the value of this Sub-Fund may experience greater volatility and is more susceptible to adverse economic, political, regulatory, foreign exchange, liquidity, tax, legal, or regulatory developments affecting the relevant sectors.

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