Alphabet (GOOG) shares were trading around $348.88 heading into today’s results, still roughly 14% below the record high they hit in May, weighed down by a summer of headlines about a delayed AI model and a finalised EU antitrust fine, none of which turned out to be the number that should have driven the share price.
Google Cloud revenue accelerated to 82% growth in the quarter, up from 63% in the first three months of the year, reaching $24.8bn, and that acceleration matters far more than anything happening with Gemini’s release schedule, since it shows enterprise demand for AI infrastructure still building rather than levelling off.
Consolidated revenue rose 24% to $119.8bn, extending a run of growth above 10% that now stretches back three years, while operating income climbed 30% to $40.8bn as margins expanded to 34%, and Search itself grew 17% even as investors keep asking whether AI answers will eat into paid clicks.
Cloud Growth Becomes the Main Investment Case
The headline EPS figure deserves more scepticism than the growth numbers do, because most of the 294% jump to $9.11 came from a $98.0bn gain buried in other income that reflected unrealised movements in Alphabet’s equity holdings rather than anything the business did this quarter.
Strip that gain out and operating income, up 30% on genuinely stronger Search, Cloud and YouTube performance, becomes the more honest number to anchor a valuation to, since it won’t swing with market movements the way reported EPS will in future quarters.
AI Spending Raises the Stakes
Capital spending is where the real tension sits, with Alphabet spending $44.9bn on property and equipment in the quarter alone, which pushed free cash flow to a negative $5.9bn and forced the company to raise $49.6bn in new equity and preferred stock in June, on top of $20.3bn in senior notes.
Long term debt has more than doubled to $98.2bn as a result, and while operating cash flow of $84.9bn over the first half suggests Alphabet can service that comfortably, it’s a materially different balance sheet from the one investors were pricing a year ago.
Gemini Delays Matter Less Than Revenue Growth
Gemini’s delayed release is really a proxy for whether that spending is buying Alphabet a durable lead or merely keeping pace, which is why Bloomberg’s report that the model fell short on coding benchmarks, followed by senior DeepMind researchers leaving for rival labs, wiped an estimated $225bn off the market cap in one bruising week in late June.
That reaction looks larger than the underlying problem warranted, given that Cloud, Search and YouTube all kept accelerating through the same period regardless of which model version was shipping, so a one quarter product delay should matter far less to the case for the shares than a durable slowdown in the businesses actually generating revenue today.
The regulatory overhang is real but contained in scale, since the European Court of Justice finalised a €4.1bn fine against Google’s Android practices on 2 July, closing an eight year case, while the separate US ad tech remedies remain unresolved and could still force structural changes to Google’s ad exchange.
Wall Street Remains Confident on Alphabet
Wall Street’s response has stayed heavily one sided into results, with 15 of the last 16 broker notes carrying Buy ratings and only UBS holding out at Hold, with a 410.00 target set back in early June. Recent moves have skewed towards raising targets rather than trimming them, with Morgan Stanley lifting its target from 375.00 to 415.00 on 30 June, KeyBanc from 425.00 to 445.00 on 10 July, and BMO Capital from 435.00 to 455.00 on 17 July, even as the Gemini headlines were at their loudest.
Citizens has held the highest target on the Street at 515.00 across three notes since June, while Evercore ISI, Wells Fargo, Wolfe Research and BofA Securities all maintained Buy ratings with targets between 420.00 and 460.00 in the fortnight before earnings, pulling the average 12 month target to 433.51 and implying close to 27% upside from current levels.
None of this makes the shares risk free from here, because a capital spending plan running past $180bn for the year only pays off if enterprise AI demand keeps compounding at anything like its current pace, and a second consecutive delay to Gemini’s flagship model would be far harder to wave away than the first.
But those are risks worth monitoring rather than reasons to sit out a business where Cloud is compounding at 82%, Search is still growing at 17%, and margins are expanding rather than under pressure, a stronger set of facts than the market’s fixation on Gemini this summer would suggest.
In my view, this quarter was the clearest evidence yet that investors had been pricing in Alphabet’s weaknesses all summer while paying too little attention to how much the strengths had improved underneath.
