Google Q2 earnings preview: $180 billion in AI investment to be tested—can Gemini and the cloud services deliver commercialization signals?

Wall Street’s revenue expectations for this report are not low. LSEG data shows analysts expect Alphabet’s second-quarter revenue to be $116.8 billion, up 21.1% year over year; expected earnings per share (EPS) are about $2.89, up about 24%. Google Cloud is expected to remain the main growth engine, with the market forecasting growth of about 63%. But the market’s real focus has long moved beyond these numbers themselves.

The shift in what the market is watching: from revenue growth to input-output efficiency

Over the past decade, Alphabet’s earnings narrative has revolved around three core metrics: search advertising revenue, the revenue growth rate, and net profit. The logic is simple and direct—Google Search holds more than 90% of the global market share, so growth in advertising revenue is almost equivalent to growth in the company’s overall value.

But the AI wave has completely changed this valuation framework. In 2026 Q1, Alphabet’s revenue grew 22% year over year to $109.9 billion, while net profit rose 81% to $62.6 billion due to a surge in equity investment gains. However, after stripping out unrealized equity gains related to companies such as Anthropic and SpaceX, adjusted EPS is actually slightly below the market’s expectation of $2.63. The market has not been fooled by book profits—investors clearly know that non-operating gains cannot support long-term valuation.

The center of market attention is undergoing a structural shift. Wall Street is no longer satisfied with asking whether Alphabet is “investing in AI,” and is instead asking three more challenging questions: Is the scale of investment in AI infrastructure reasonable? When will these investments translate into revenue growth? Can the profit margins of the AI business support the current valuation level?

$180 billion to $190 billion in capital expenditures: a game of scale and returns

Alphabet’s planned capital expenditures for 2026 are at the heart of this game. Earlier this February, the company expected full-year capital expenditures of $175 billion to $185 billion; when it released its Q1 earnings report in April, management raised the range to $180 billion to $190 billion. This figure is about six times 2022 capital expenditures (about $31 billion) and twice 2025’s level ($91.4 billion).

Alphabet’s single-quarter capital expenditures in Q1 already reached $35.7 billion, up 107% year over year, equivalent to 78% of the company’s operating cash flow of $45.8 billion for the period. As a result, free cash flow fell 47% year over year. Alphabet also raised about $85 billion through equity financing for AI infrastructure construction—this is the first time in decades the company has broken the convention of driving growth primarily through internal financing.

What the market worries about is whether these investments can generate enough incremental revenue before depreciation pressures start to hit. In 2025, Alphabet’s depreciation expense rose 38% year over year to $21.1 billion, and the company expects the growth rate of depreciation expense in 2026 to accelerate further. If AI revenue growth does not accelerate in parallel, pressure on profit margins is inevitable.

Google Cloud: the most direct channel for turning AI investment into revenue

Across all business segments, Google Cloud is the clearest indicator that AI investment is producing returns.

In Q1, Google Cloud revenue grew 63% year over year to $20.03 billion, breaking through the $20 billion-per-quarter threshold for the first time. The operating profit margin of the cloud business expanded sharply from 17.8% in the same period last year to 32.9%. The backlog nearly doubled quarter over quarter, reaching a record high of $462B.

The significance of this order backlog is that it represents long-term commitment from enterprise customers to Google’s AI infrastructure and AI services. The company expects slightly more than half of this backlog to be converted into recognized revenue within the next 24 months. If the cloud business can continue to convert backlog into actual revenue while maintaining profit margin levels, the commercial closed loop of AI infrastructure investment will be validated.

There is disagreement in market expectations for Google Cloud in the second quarter. While the public consensus expects growth of about 63% to 65%, some institutions—such as Bank of America expecting 70% and Wells Fargo expecting 72%—have given higher forecasts. Deutsche Bank also raised its forecast for Google Cloud revenue growth to 70% to 75% ahead of the earnings release. This suggests that the market’s “implicit threshold” for the cloud business may already be higher than the public numbers. Even if cloud growth reaches 63%, if it falls short of some institutions’ internal expectations, the stock could still face pressure.

In addition, Alphabet’s self-developed TPU (Tensor Processing Unit) chips have begun being sold to external customers. The company expects to recognize a small amount of TPU hardware revenue later this year, with most of the revenue to show up in 2027. Any progress in this business could change analysts’ framework for evaluating the long-term commercial potential of Alphabet’s AI strategy.

Gemini: the leap from model capabilities to commercial revenue

Competition among AI models has entered a new stage. In Q1, Gemini-related models processing tokens per minute via API calls exceeded 16 billion, up 60% quarter over quarter. Gemini Enterprise’s paid monthly active users grew 40% quarter over quarter. But what the market cares about is not these technical metrics—rather, whether these capabilities can be converted into measurable revenue.

As reported by Bloomberg, the release of Google’s flagship AI model Gemini 3.5 Pro has been delayed by several months compared with the original plan, and the company is spending more time improving the model’s programming capabilities. The model was originally planned to be released in June. This delay intensifies market concerns about the return on massive data center spending.

From the industry evolution perspective, AI commercialization is transitioning from a “model capability competition” to an “application revenue competition.” Model parameter scale and benchmark scores are just the first-stage competition metrics; the key question in the second stage is: will AI features make users willing to pay? Will enterprise customers increase budgets for AI tools? Can AI search integration improve user stickiness without eroding advertising revenue? The answers to these questions will determine the long-term return on Alphabet’s AI investment.

The earnings report could reshape the valuation logic for the AI industry

The significance of Alphabet’s earnings report goes beyond the company itself. As one of the technology companies with the largest investment scale in global AI infrastructure, Alphabet’s performance and capital expenditure guidance are viewed as key indicators for observing the direction of the global AI industry.

If Alphabet can demonstrate AI revenue growth, continued cloud expansion, and stable profit margins, while keeping its capital expenditure guidance modest, market confidence in the AI industry’s long-term growth will be strengthened. This could drive capital back into AI-related sectors.

Conversely, if AI spending continues to be raised beyond expectations, cloud growth begins to slow, and progress in commercializing AI products falls short of expectations, the market may re-evaluate the time horizon of the AI investment cycle. The main line of competition in today’s U.S. AI stock sector has shifted from “a shortage of compute power” to “concerns about excess capacity.” Any signal that AI investment returns fall short of expectations could trigger ripple effects across the industry chain.

Four key things to watch during the earnings call

For investors following this earnings report, the following four questions are worth tracking closely during the earnings call:

The conversion pace of the cloud business backlog. The $462B backlog is the core support for market confidence in Google Cloud, but the key is how quickly these orders convert into recognized revenue. Any change in management’s commentary on the conversion timeline is worth watching.

Whether capital expenditure guidance is raised again. Alphabet has stated that 2027 capital expenditures will increase “significantly” from the 2026 baseline. If 2026 guidance is raised again, or if the increase in 2027 exceeds market expectations, pressure on free cash flow will grow further.

The release timeline for Gemini 3.5 Pro. Model delays have affected market sentiment. Management’s clear guidance on the release schedule, and transparency about the reasons for the delay, will influence market judgment about Google’s AI competitiveness.

The impact of AI integration in search advertising. In Q1, Google Search and other advertising revenue grew 19% year over year to $60.4 billion. The market is watching whether AI Overviews and AI search modes can improve user experience and ad conversion efficiency without eroding advertising revenue.

For most investors, the conclusion is becoming clearer: what the market needs is not a narrative about how much Alphabet is “spending on AI,” but verifiable evidence of what that money is producing. Strong revenue numbers are no longer enough to justify the stock price today—the market is waiting for a clear signal that AI investment is moving from the “spending-money stage” to the “making-money stage.” Management’s responses to these questions during the earnings call may be just as important as the earnings numbers themselves.

FAQ

Q1: What are the revenue and EPS expectations for Alphabet’s 2026 Q2 earnings report?

LSEG data shows the market expects Alphabet Q2 revenue of about $116.8 billion, up 21.1% year over year; EPS of about $2.89, up about 24%. Google Cloud is expected to remain the main growth engine, with the market expecting growth of about 63%.

Q2: What is Alphabet’s planned capital expenditures for 2026?

Alphabet raised its full-year 2026 capital expenditure guidance to $180 billion to $190 billion, from a prior expectation of $175 billion to $185 billion. The company also said 2027 capital expenditures will increase “significantly” from the 2026 baseline. This scale is about six times 2022 and twice 2025.

Q3: How did Google Cloud perform in Q1? What does the backlog mean?

In Q1, Google Cloud revenue grew 63% year over year to $20.03 billion. Operating profit margin expanded from 17.8% to 32.9%, and the backlog nearly doubled quarter over quarter to $462B. The company expects slightly more than half of this backlog to convert into recognized revenue within the next 24 months, providing important support for the commercial returns on AI infrastructure investment.

Q4: How does the delay of Gemini 3.5 Pro affect Alphabet?

According to Bloomberg, the release of Gemini 3.5 Pro has been delayed by several months versus the original plan. The model was originally scheduled for release in June, and the company is spending more time improving its programming capabilities. This delay heightens market concerns about returns on massive AI spending, which is one of the factors behind the stock’s pressure ahead of the earnings report.

Q5: What does this earnings report mean for the AI industry as a whole?

As one of the technology companies with the largest investment scale in global AI infrastructure, Alphabet’s performance and capital expenditure guidance are seen as key indicators for observing the direction of the global AI industry. If the earnings report shows that AI spending is generating returns, it will reinforce market confidence in the AI industry’s long-term growth; otherwise, it could trigger a re-evaluation of the entire AI investment cycle and the valuation logic.