Alphabet Stock Sinks 1.2% as Q2 Earnings Beat Masked by $205B Capex Surge

Alphabet reported Q2 revenue of $119.8 billion, beating analyst expectations by $2.9 billion, driven by 82% growth in Google Cloud. Yet the company raised its 2026 capex forecast to $195-205 billion, up $15 billion from prior guidance. The stock fell 1.2% to $341.91 on the news, as investors grappled with negative free cash flow of $5.9 billion and mounting AI costs.

Q2 earnings crush expectations despite capex shock

Alphabet posted adjusted earnings per share of $2.85 against expectations of $2.89, and revenue of $119.8 billion versus $116.93 billion forecast. Google Cloud was the standout, generating $24.77 billion in revenue, a 82% year-over-year jump. Google Services revenue rose to $81.63 billion, beating the $81.12 billion estimate. CEO Sundar Pichai called Q2 “an amazing quarter,” noting that nearly 90% of the Fortune 100 now use Gemini Enterprise and Gemini models process 22 billion API tokens per minute.

AI spending burns through cash for first time

Alphabet posted negative free cash flow of $5.9 billion in Q2, the first time in at least a decade, as capital expenditures hit $45 billion with 60% going to servers and 40% to data centers. The company confirmed 2027 capex will be “significantly” higher than 2026. Finance chief Anat Ashkenazi told analysts the company remains in a “supply-constrained environment” with demand for AI infrastructure outpacing investment.

Meyka data shows valuation stress amid AI race

Meyka grades Alphabet B+ with a neutral recommendation, citing a PE ratio of 26.08 and a price-to-book ratio of 8.71, both elevated for a mature tech giant. The 12-month price target of $364.44 sits 6.5% above current levels. Technical indicators show weakness: RSI at 41.48 signals oversold conditions, while the CCI at -137.85 confirms extreme selling pressure. With six analysts rating the stock a buy but no price targets published, investors face uncertainty on whether capex will eventually translate to AI revenue.

Delayed Gemini 3.5 Pro adds competitive pressure

Alphabet delayed the launch of Gemini 3.5 Pro over capability concerns, a setback in the race against OpenAI and Anthropic. The company is already investing compute into Gemini 4 to stay competitive. CEO Pichai said the shift to AI “feels like early innings” and the company has “disciplined” plans to generate returns on spending, but no timeline or ROI targets were disclosed. Investor Rachel Winter at Killik & Co noted the capex surprise “suggests there is a little bit of concern about those levels.”

Operating margin holds but depreciation headwind looms

Alphabet’s operating margin reached 36.1% in Q1, its highest in five years, as revenue growth of 22% outpaced cost increases. Wall Street expects Q2 margin to ease to 34.7% as capex approaches $44 billion. The company spreads server costs across six years via depreciation, meaning today’s $200 billion-plus spending will weigh on profits well into 2032. Remaining performance obligations hit $514 billion, signaling strong future revenue but requiring continued infrastructure investment to fulfill contracts.

Final Thoughts

Alphabet’s cloud boom and strong earnings beat mask a cash burn crisis driven by AI infrastructure spending. With capex rising to $205 billion and free cash flow negative, the stock’s 1.2% drop reflects investor concern that AI returns may take years to materialize. Meyka’s B+ grade and elevated valuation multiples suggest limited upside until profitability recovers.

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