Google Earnings Preview: Cutting AI Capital Expenditure Poses Potential Risks, Cloud and Search Key to Performance

On July 22, Alphabet (GOOG/GOOGL) will hold its Q2 2026 earnings call at 1:30 PM Pacific Time and 4:30 PM Eastern Time, which corresponds to 4:30 AM Beijing Time on July 23. Earnings materials will be released prior to the call. Market focus will be on AI capital expenditure guidance, ROI, Google Cloud growth, search advertising performance, and changes in cloud business backlog.

From an institutional perspective, analyst Justin Post maintains a positive outlook on Alphabet, believing that Google Cloud and search business remain the most important performance supports for this quarter. He expects the cloud business to continue its strong growth, and search advertising is likely to benefit from the commercialization improvements brought by AI integration. However, the analyst also warns that rising hardware costs, such as memory, may push up the AI infrastructure budget, and there is a possibility that Alphabet's capital expenditure expectations for this year may increase further.

Another institution is also optimistic and has raised its target price for Alphabet ahead of the earnings report. This institution believes that data center expansion and backlog orders will continue to support Google Cloud growth, and the demand for AI training and inference is still being released. However, it also mentioned that the pace of the Gemini product may bring some uncertainty, and investors will be watching whether management can provide a clearer commercialization path for AI products.

Another institution's focus is more on the cost side. It believes that the market needs to assess whether customers will turn to lower-cost AI models and whether hardware price increases will continue to affect Alphabet's spending plans. The scale of AI investment is no longer the only focus; investment efficiency, profit margin impacts, and free cash flow pressure are equally important.

Not all forecasts are optimistic for Alphabet. An article by finance professor and CTA Damir Tokic has caused a "quake" in the U.S. stock investment circle, suggesting that Alphabet may be the first among large tech companies to lower its AI capital expenditure expectations, primarily due to weakening free cash flow, rising financing costs, and the lack of sufficient proof of AI investment returns.

Tokic pointed out that Alphabet had previously raised its AI investment plan for 2026, and the market originally expected the company to continue to increase investments in data centers, servers, and cloud infrastructure. However, high expenditures are compressing cash flow, and if the company continues its aggressive expansion, it may need to rely on debt or equity financing, leading to credit risk and shareholder dilution pressure.

Another institution's forecast also emphasizes free cash flow risks. Previously, Alphabet faced pressure on free cash flow due to increased investments in AI and data centers, and the market will focus on whether this trend continues. If Google Cloud continues to grow rapidly, search advertising remains stable, and management does not further raise capital expenditure expectations, the stock price is more likely to find support; if capital expenditure guidance continues to rise, investors may reassess future cash flow discounting.

Overall, the key to Alphabet's earnings report lies in whether management can prove that AI spending is translating into revenue growth. Google possesses multiple assets such as search entry, advertising systems, cloud services, TPU, and Gemini models, but high-intensity capital expenditures have also raised market expectations for returns. If the upcoming earnings report fails to demonstrate that AI investments are generating sufficient revenue, Alphabet's capital expenditure plans and stock price may face repricing.

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