Alphabet, the parent company of Google, reported second-quarter results that exceeded market expectations, driven by explosive growth in its cloud business. However, concerns are growing over the company's investments in artificial intelligence (AI), which led to its first-ever negative free cash flow (FCF).
On July 22, Alphabet announced that its second-quarter revenue rose 24% year-over-year to $119.8 billion (approximately 177 trillion won), surpassing the market forecast of $116.9 billion compiled by the London Stock Exchange Group (LSEG). This marks the 12th consecutive quarter of revenue growth for the company.
Notably, Google Cloud revenue surged 82% to $24.8 billion, fueled by demand for AI model development and computing infrastructure. The cloud backlog also increased from $460 billion in the previous quarter to $514 billion. Revenue from the search segment and YouTube ads reached $63.2 billion and $11.1 billion, respectively, continuing their double-digit growth.
Net income nearly tripled from the previous year to $112.1 billion (approximately 166 trillion won), with earnings per share (EPS) significantly exceeding LSEG's estimate of $2.90, coming in at $9.11. However, this surge in net income included a one-time gain of approximately $98 billion (about 145 trillion won) due to the increase in the value of stakes in other companies held by Alphabet.
Despite the strong earnings, market attention shifted to the burden of investment. Alphabet's capital expenditures (CapEx) for the second quarter reached $44.9 billion, nearly double the amount from the same period last year. CapEx, which was around $22 billion to $24 billion in the second and third quarters of last year, has sharply increased to $28 billion in the fourth quarter and $36 billion in the first quarter of this year.
Additionally, Anant Ashkenazi, Alphabet's Chief Financial Officer (CFO), raised the company's capital expenditure forecast for the year from $180 billion to $190 billion to a range of $195 billion to $205 billion. He noted that while the company has significantly expanded its capacity over the past three years, demand continues to outpace investment levels, and the faster-than-expected supply of facilities also influenced the upward revision of the CapEx forecast.
As a result of these large-scale investments, the second-quarter free cash flow (FCF) recorded a negative $5.86 billion. FCF, which exceeded $24 billion per quarter in the second half of last year, dropped to around $10 billion in the first quarter of this year before turning negative. According to Stansberry Research, this marks the first time Alphabet's quarterly FCF has been negative since its IPO in 2004.
Concerns Over Excessive Investment
On Wall Street, the upper limit of annual capital expenditures exceeding $200 billion is seen as a breach of a psychological barrier. Brian Mulberry, a portfolio manager at Jackson Investment Management, stated, "$200 billion should not be exceeded," adding that the company has not sufficiently explained how such significant cash outflows will translate into future revenue growth.
Yousef Squali, a senior analyst at Truist Securities, assessed that if the $205 billion figure is used as a benchmark, capital expenditures could reach a concerning level by 2027.
Sundar Pichai, Alphabet's Chief Executive Officer (CEO), emphasized the need for increased investment, stating, "AI investments are opening new possibilities across all business areas." He noted that about 90% of Fortune 100 companies are using the enterprise Gemini service, with the monthly active users (MAU) of the Gemini app reaching 950 million.
However, concerns persist regarding the delay in the launch of Gemini 3.5 Pro and the pace of model development compared to competitors. CEO Pichai acknowledged, "While many areas still maintain cutting-edge standards, there are also areas that need improvement," and revealed that the company is testing Gemini 3.5 Pro while beginning the training for the next-generation model, Gemini 4.
Alphabet's stock fell 1.46% during regular trading and dropped more than 4% in after-hours trading following the earnings announcement. This decline is attributed to the cost burden from large-scale AI investments, despite strong performance in the cloud and search businesses.
* This article has been translated by AI.
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