Alphabet earnings preview: Behind the light of strong growth, five major questions in the market need to be answered urgently
After the market closes on Wednesday Eastern Time (early Thursday morning Beijing time), Google parent company Alphabet will announce its second-quarter financial results and hold an earnings call. As one of the world’s “Seven Giants,” Alphabet’s performance and the statements of its executives may determine the future direction of global AI transactions and investor sentiment.
After the market closes on Wednesday Eastern Time (early Thursday morning Beijing time), Google parent company Alphabet will announce its second-quarter financial results and hold an earnings call. As one of the world’s “Seven Giants,” Alphabet’s performance and the statements of its executives may determine the future direction of global AI transactions and investor sentiment. As Kevin Mahn, chief investment officer of Hennion & Walsh Asset Management, said: "If Alphabet releases any signal to reduce its AI investment budget, it may trigger a chain reaction throughout the AI industry chain and have a serious impact on AI transactions." Can Alphabet's strong performance continue? First, let’s review Alphabet’s last financial report performance: In the first quarter of this year, Alphabet's revenue exceeded the US$100 billion mark for the third consecutive quarter, a year-on-year increase of 22% to US$109.9 billion. Net profit soared 81% year-on-year to a record $62.6 billion, and earnings per share (EPS) also hit a record high of $5.11. Yet within its massive revenue, a whopping $37.7 billion in "other revenue" - including unrealized market capitalization gains on Alphabet's minority stakes in Anthropic and SpaceX - almost entirely pushed up earnings. Excluding this revenue, earnings per share would have been 1 cent lower than the consensus estimate of $2.63. Alphabet first-quarter results highlights Among the major businesses, Google Cloud performed the most outstandingly: revenue accelerated to US$20 billion (a year-on-year increase of 63%), the fastest growth among major cloud service providers; operating profit margin increased significantly from 17.8% to a record 32.9%; backlog of orders almost doubled month-on-month to a record US$462 billion. Company management raised its full-year capital expenditures (capex) forecast to $180 billion to $190 billion and hinted at further "significant growth" in 2027. Looking forward to the second quarter, analysts' expectations according to LSEG statistics show that the market generally expects the company's second-quarter revenue to further increase to US$116.8 billion (a year-on-year increase of 21.1%), which is basically the same as the first quarter's growth rate of 21.8%. Second quarter performance outlook Google Cloud is expected to remain the main growth engine, with growth expected to be approximately 63%. It's worth noting that other business segments - such as that of its self-driving car company Waymo - are expected to return to growth after shrinking for two consecutive quarters. The market also expects the company's profit margin to expand nearly 3 percentage points to 35.3%, reflecting continued operating leverage from the expansion of Google Cloud's business and the efficiency improvements mentioned by management on the first-quarter conference call. Five major concerns about earnings calls Although the financial report data is expected to be strong, investors' attention is obviously not limited to this. At a time when investors in the global market are increasingly worried about the growth prospects of technology giants and the risks of huge expenditures, Alphabet management may need to answer the five major questions of analysts during the earnings call. 1. Can Google Cloud’s growth dominance withstand the impact of new competitors? Although Google Cloud's revenue in the first quarter increased by 63% year-on-year, ahead of Microsoft's Azure (40%) and Amazon's AWS (28%), more and more competitors are emerging - for example, Meta's newly released "Meta Compute" cloud service has announced the direct sale of AI computing power and model access rights, which means that Meta has also officially entered the cloud computing market, and Alphabet will have to face another strong competitor. In the context of increasing competitive pressure, whether Google Cloud can maintain its current high-speed growth momentum will directly affect its market leadership. 2. Has the company’s external sales of TPU been converted into actual revenue? In recent months, Alphabet has been accelerating the commercialization of its custom AI chip, the Tensor Processing Unit (TPU):
In April this year, Alphabet directly delivered eighth-generation TPU hardware to selected customers for the first time, including training TPU 8t and inference TPU 8i. This is the first time in Google’s history that a chip has been sold as an independent product; in May, Google and Blackstone announced the establishment of a joint venture, planning to use its TPU to build a new AI cloud company, which will directly rent TPU computing resources to AI laboratories and enterprises starting in 2027. Alphabet management expects hardware sales to begin contributing revenue to the company in the second half of 2026, with the majority of revenue coming in 2027. And investors will be paying close attention to whether Alphabet's chip business is becoming a true second source of revenue and not just an internal cost advantage. 3. What is the cash consumption driven by capital expenditure? Alphabet's capital expenditures and cash flow are also a major concern: Alphabet's first-quarter capital expenditures increased 107% year-on-year to US$35.7 billion; fiscal year 2026 is expected to be US$180 billion to US$190 billion, of which US$84.75 billion in equity funds raised in June will be used for artificial intelligence infrastructure construction. In addition, Alphabet has raised about $40 billion in debt financing for general corporate purposes this year. As of the end of the first quarter, Alphabet's free cash flow fell 47% year-on-year - whether this trend will continue and the forecast of the scale of capital expenditures in 2027 will be key risks that the market needs to pay close attention to. 4. Is Gemini really catching up with ChatGPT and Claude? In the past two quarters, Google's Gemini model has narrowed the competitive gap with OpenAI and Anthropic, and the latest new generation of artificial intelligence large model Gemini 3.5 Pro released on July 17 provides management with a new data reference point. The market will be closely watching Gemini model usage metrics - including monthly active users (MAUs) of Gemini apps, application programming interface (API) adoption, and enterprise transaction volume - as a true test of whether this growth translates into capturing market share from competitors. At present, Google Search has introduced a number of generative AI functions such as AI overview and AI interaction mode, aiming to improve users' information acquisition efficiency and interactive experience. How much commercial gains these AI functions can bring to Google's search business will remain a question of continued concern to investors.
In April this year, Alphabet directly delivered eighth-generation TPU hardware to selected customers for the first time, including training TPU 8t and inference TPU 8i. This is the first time in Google’s history that a chip has been sold as an independent product; in May, Google and Blackstone announced the establishment of a joint venture, planning to use its TPU to build a new AI cloud company, which will directly rent TPU computing resources to AI laboratories and enterprises starting in 2027. Alphabet management expects hardware sales to begin contributing revenue to the company in the second half of 2026, with the majority of revenue coming in 2027. And investors will be paying close attention to whether Alphabet's chip business is becoming a true second source of revenue and not just an internal cost advantage. 3. What is the cash consumption driven by capital expenditure? Alphabet's capital expenditures and cash flow are also a major concern: Alphabet's first-quarter capital expenditures increased 107% year-on-year to US$35.7 billion; fiscal year 2026 is expected to be US$180 billion to US$190 billion, of which US$84.75 billion in equity funds raised in June will be used for artificial intelligence infrastructure construction. In addition, Alphabet has raised about $40 billion in debt financing for general corporate purposes this year. As of the end of the first quarter, Alphabet's free cash flow fell 47% year-on-year - whether this trend will continue and the forecast of the scale of capital expenditures in 2027 will be key risks that the market needs to pay close attention to. 4. Is Gemini really catching up with ChatGPT and Claude? In the past two quarters, Google's Gemini model has narrowed the competitive gap with OpenAI and Anthropic, and the latest new generation of artificial intelligence large model Gemini 3.5 Pro released on July 17 provides management with a new data reference point. The market will be closely watching Gemini model usage metrics - including monthly active users (MAUs) of Gemini apps, application programming interface (API) adoption, and enterprise transaction volume - as a true test of whether this growth translates into capturing market share from competitors. At present, Google Search has introduced a number of generative AI functions such as AI overview and AI interaction mode, aiming to improve users' information acquisition efficiency and interactive experience. How much commercial gains these AI functions can bring to Google's search business will remain a question of continued concern to investors.