After the U.S. market closes on Wednesday, Alphabet, the parent company of Google, will release its second-quarter earnings report and host its earnings call.
As one of the global "Magnificent Seven," Alphabet's financial performance and the remarks from its executives could determine the future direction of global AI deal flow and investor sentiment.
As Kevin Mahn, Chief Investment Officer at Hennion & Walsh Asset Management, stated:
"As the world's third-largest publicly traded company by market capitalization and one of the U.S.'s largest 'hyperscale cloud providers' in terms of AI infrastructure investment, Alphabet not only represents the health of the internet advertising industry but is also seen as a bellwether for AI capital expenditure."
"If Alphabet signals any intention to cut its AI investment budget, it could trigger a chain reaction across the entire AI industry chain and deal a severe blow to AI-related transactions."
Can Alphabet's Strong Performance Continue?
Let's first review Alphabet's last earnings report:
In the first quarter of this year, Alphabet's revenue surpassed the $100 billion mark for the third consecutive quarter, rising 22% year-over-year to $109.9 billion. Net profit surged 81% year-over-year to a record $62.6 billion, and earnings per share (EPS) also hit a historic high of $5.11.
However, within this massive revenue figure, a substantial $37.7 billion came from "Other income" — which included unrealized mark-to-market gains on Alphabet's minority stakes in companies like Anthropic and SpaceX — virtually single-handedly boosting profits. Excluding this income, EPS would have been one cent lower than the consensus estimate of $2.63.
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Highlights of Alphabet's Q1 Performance
Among its major business segments, Google Cloud stood out the most: revenue accelerated to $20.0 billion (up 63% year-over-year), making it the fastest-growing among major cloud service providers; its operating margin expanded significantly from 17.8% to a record 32.9%; and its backlog nearly doubled sequentially to a record $462.0 billion.
Management raised its full-year capital expenditure (capex) guidance to a range of $180 billion to $190 billion and hinted at a further "substantial increase" in 2027.
Looking ahead to the second quarter, analyst expectations compiled by LSEG show the market consensus is for revenue to grow further to $116.8 billion (up 21.1% year-over-year), essentially flat with the 21.8% growth rate seen in Q1.
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Q2 Performance Outlook
Google Cloud is expected to remain the primary growth engine, projected to grow by approximately 63%. Notably, other business segments — such as the one housing its self-driving car company Waymo — are expected to return to growth after contracting for two consecutive quarters.
The market also expects the company's profit margin to expand by nearly 3 percentage points to 35.3%, reflecting the ongoing operating leverage from the scale expansion of Google Cloud and efficiency improvements mentioned by management during the Q1 earnings call.
Five Key Investor Questions for the Earnings Call
Despite the expected strong financial data, investor focus clearly extends beyond that. At a time when global market investors are growing increasingly concerned about the growth prospects and massive spending risks of tech giants, Alphabet's management may need to address five major questions from analysts during the earnings call.
1. Can Google Cloud's Growth Supremacy Withstand Challenges from New Entrants?
Although Google Cloud's Q1 revenue grew 63% year-over-year, outpacing Microsoft's Azure (40%) and Amazon's AWS (28%), an increasing number of competitors are emerging. For instance, Meta's recently launched "Meta Compute" cloud service has announced it will directly sell AI computing power and model access externally, signifying Meta's formal entry into the cloud computing market. Alphabet will now have to face another formidable competitor.
In this environment of mounting competitive pressure, whether Google Cloud can maintain its current high growth momentum will directly impact the landscape of its market leadership.
2. Has the External Sale of the Company's TPUs Translated into Actual Revenue?
In recent months, Alphabet has been accelerating the commercialization process of its custom AI chips — Tensor Processing Units (TPUs):
In April this year, Alphabet began direct deliveries of its eighth-generation TPU hardware, including the training-focused TPU 8t and inference-focused TPU 8i, to select customers. This marks the first time in Google's history that chips have been sold as standalone products. In May, Google and Blackstone announced a joint venture, planning to use its TPUs to build a new AI cloud company. This venture will directly lease TPU computing resources to AI labs and enterprises starting in 2027.
Alphabet's management expects hardware sales to begin contributing revenue in the second half of 2026, with the majority of revenue coming in 2027. Investors will closely watch whether Alphabet's chip business is becoming a genuine second revenue stream, rather than merely an internal cost advantage.
3. What is the Cash Burn Situation Driven by Capital Expenditure?
Alphabet's capital expenditure and cash flow situation is another major focus: Q1 capex increased 107% year-over-year to $35.7 billion; the FY 2026 guidance is $180 billion to $190 billion, with the $84.75 billion in equity capital raised in June earmarked for AI infrastructure construction. Additionally, Alphabet raised approximately $40 billion through debt financing this year for general corporate purposes.
By the end of Q1, Alphabet's free cash flow had declined 47% year-over-year — whether this trend will persist and any preview of the 2027 capex scale will be key risks the market needs to watch closely.
4. Is Gemini Truly Catching Up to ChatGPT and Claude?
Over the past two quarters, Google's Gemini model has narrowed the competitive gap with OpenAI and Anthropic, and the latest release of the new-generation large language model Gemini 3.5 Pro on July 17 provides management with a new data point for reference.
The market will closely monitor Gemini's usage metrics — including monthly active users (MAU) for Gemini applications, API adoption rates, and enterprise deal volume — as a true test of whether this growth momentum can translate into actual market share gains from competitors.
5. How Much Gain Has AI Brought to Google Search's Advertising Engine?
Currently, Google Search has introduced several generative AI features like AI Overview and AI interactive modes, aimed at enhancing user information retrieval efficiency and interactive experience. How much commercial benefit these AI features can bring to Google's Search business will remain a persistent question for investors.
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