Following the release of Google parent Alphabet's second-quarter results, brokerage Phillip Securities raised its rating from Neutral to Overweight, arguing that the market is overly fixated on short-term capital expenditure pressures while underestimating the long-term value of the company's artificial intelligence ecosystem. However, the firm also significantly lowered its earnings expectations to reflect the financial impact of the tech giant's massive AI investments.
Analyst Serena Lim Yi Qi reduced the price target for Alphabet (GOOGL) from $450 to $425, and decreased profit forecasts for the coming quarters to account for the drag on free cash flow from expanded capital spending. While Alphabet's second-quarter revenue surged 24% year-over-year to $119.8 billion, and its Google Cloud revenue jumped 82% to $24.8 billion—both figures exceeding market expectations—the company simultaneously raised its full-year 2026 capital expenditure guidance to between $195 billion and $205 billion, well above forecasts. This move drove free cash flow into negative territory for the first time since the company went public.
Phillip Securities believes that Alphabet possesses a complete vertical integration system for AI, spanning from in-house chip design to data centers and the Gemini model, creating a durable long-term competitive moat. The company's cloud backlog has also grown to $514 billion, providing a strong foundation for future growth. The firm contends that market concerns over the return on AI investment may be exaggerated, predicting that Alphabet's AI infrastructure spending will translate into stronger revenue growth and market share gains over the medium to long term. In contrast, other institutions like Bernstein have lowered their price targets due to the scale of capital expenditure, underscoring that investors still require more concrete evidence that the tech giant's annual $200 billion AI outlay can consistently drive earnings growth.
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