Alphabet 2Q26 Preview: Cloud Demand Outruns Capacity as Capex Doubles to About US$185bn
Alphabet reports 2Q26 results on 22 July. The first quarter set a high bar: revenue grew 22% to US$109.9bn, Google Cloud grew 63% to US$20bn with management calling itself compute constrained, and the 2026 capital-expenditure guide was raised to US$180-190bn, roughly double last year. The stock has since cooled to about US$353, near 12% below its May high, as investors weigh that spending against the payoff. The print tests whether Cloud momentum and Search resilience keep validating the bill.
Key Takeaways
Will Google Cloud growth stay near 60%?
Cloud grew 63% YoY to US$20bn in the first quarter, its first above US$20bn, with backlog near US$462bn and demand still running ahead of capacity. Whether the June quarter holds a similar pace is the clearest read on how fast the AI buildout is converting into revenue.
Capex has roughly doubled to about US$185bn this year
Management raised the 2026 capex guide to US$180-190bn, close to double last year's US$91bn, and said 2027 would increase again. The question the market is now asking is when the spending curve bends toward free cash flow, not just revenue.
Can Search keep growing as AI reshapes it?
Search advertising is still the profit engine, and the debate is whether AI Overviews and Gemini add queries and monetization or chip away at them. First-quarter total revenue up 22% says the core held, and another clean quarter would extend that read.
The stock goes in priced in line with mega-cap peers
Alphabet trades at 24.7x forward earnings, essentially on the 24.1x mega-cap peer median, while carrying the fastest revenue growth in that group. After the capex-driven pullback it sits about 12% below its May high.
Company snapshot
Alphabet is the parent of Google, the world's largest search and digital-advertising business, and Google Cloud, its enterprise computing and AI platform. Advertising across Search, YouTube, and the Google Network still generates the large majority of revenue and nearly all operating profit, while Google Cloud is the primary growth engine. The company also houses the DeepMind AI research lab, the Android and Chrome platforms, and the Other Bets portfolio including Waymo. It reports in US dollars and is dual-class listed on Nasdaq as GOOGL and GOOG.
What the street expects, and where our numbers sit
Alphabet does not guide revenue or earnings, so the expectations below are street consensus, except the capital-expenditure line, which is the company's own guide. Our model carries FY26E revenue and operating income in line with the street.
| Metric | 2Q26E | FY26E |
|---|---|---|
| Revenue | about +20% YoY (street) | US$487bn, +21% (street) |
| EPS | US$2.86, +24% YoY (street) | about US$14.2 (our model, GAAP) |
| Operating margin | not guided | 32.5% (our model, on street operating income) |
| Capex | not guided | US$180-190bn guided (raised from US$175-185bn) |
| Reported to date | 1Q26 revenue US$109.9bn, +22%; Cloud US$20bn, +63% | capex about double FY25's US$91bn |
We hold FY26E revenue of US$487bn and operating income of US$158bn, in line with consensus, on a 32.5% operating margin. GAAP earnings per share are lumpy because Alphabet books large gains and losses on its equity investments through other income, so operating income is the cleaner read on the underlying business than net income or EPS in any single quarter.
Recent developments ahead of the print
- The first quarter was a beat that raised the bar. Alphabet reported 1Q26 revenue of US$109.9bn, up 22% YoY and about US$3bn ahead of the roughly US$106.6bn the street expected, with net income of US$62.6bn. The shares rose about 10% on the print.
- Google Cloud accelerated and is capacity constrained. Cloud revenue reached US$20bn, up 63% YoY and the first quarter above that level, with backlog near US$462bn after nearly doubling sequentially. Chief executive Sundar Pichai said on the call, "We are compute constrained in the near term," and that cloud revenue would have been higher had the company been able to meet demand.
- The capex guide was raised, with more to come. Alphabet lifted its 2026 capital-expenditure range to US$180-190bn from US$175-185bn, roughly double the US$91bn spent in 2025, and Chief Financial Officer Anat Ashkenazi said 2027 spending would increase significantly. The spending is centered on servers, data centers, and networking for AI.
- The antitrust cases are unresolved but slow moving. The December 2025 search remedy stopped short of a Chrome or Android divestiture but bars exclusive default-search contracts and requires Google to share certain search data with rivals; both Google and the Department of Justice have appealed, with arguments expected in late 2026 or 2027. A separate ad-tech remedies ruling is still pending.
- The shares cooled into the print. After a May high near US$402, GOOGL trades around US$353, about 12% lower, as investors weigh the doubling capex and the free-cash-flow impact against the growth, alongside the longer-running question of how AI reshapes Search.
How 2026 is tracking after a strong first quarter
Alphabet reports quarterly, so the clearest read going into 2Q26 is the first quarter it has already posted, and the spending trajectory it guided alongside it.
| 1Q26 (reported) | Value | YoY |
|---|---|---|
| Total revenue | US$109.9bn | +22% |
| Google Cloud revenue | US$20.0bn | +63% |
| Net income | US$62.6bn | +81% |
| Google Cloud backlog | about US$462bn | nearly 2x QoQ |
| 2026 capex guide | US$180-190bn | raised from US$175-185bn |
The first quarter tracked well ahead of the pace the full-year street numbers imply, led by Cloud and by Search advertising that held up as AI features expanded. What stepped up alongside it was the spending: the capex guide now points to roughly double the 2025 outlay, which is why the free-cash-flow impact has become the central question rather than the growth rate.
What to expect from the release
- Another quarter of about 20% revenue growth, led by Google Cloud and by Search advertising. The first quarter was up 22%, and the street looks for 2Q26 earnings per share of US$2.86, up about 24% YoY.
- Cloud growth in the high-50s to low-60s percent, still capacity constrained. The key detail is whether the backlog keeps building and whether the compute-constraint language eases as new data centers come online.
- No change to the capex guide as our base case, holding at US$180-190bn, with the risk skewed toward another raise given the capacity constraint, plus a first sense of the 2027 step-up.
- Operating margin around the low-30s percent, with reported net income and EPS again swung by gains or losses on equity investments, so operating income is the line to read for the underlying business.
The three issues that matter on 22 July
The quarter can move the multi-year picture in three places. Everything else is secondary to these.
- Google Cloud growth and backlog. Whether Cloud holds near 60% growth, whether the roughly US$462bn backlog keeps rising, and whether management still describes itself as compute constrained. This is the clearest single read on how fast AI demand is converting into revenue, and it is what most directly justifies the spending.
- The capex line and the first look at 2027. Whether 2026 stays at US$180-190bn or is raised again, and any number or range put on the 2027 increase. The read-through is free cash flow, which compressed as capex stepped up, and the point at which the spending curve is expected to bend.
- Search advertising and AI monetization. Whether Search ad revenue keeps growing at a double-digit pace as AI Overviews and Gemini expand, which would show AI adding to monetization rather than eroding it. The antitrust remedies are the standing risk on this line, though the appeal timeline pushes any real effect out to 2027 and beyond.
Valuation: priced in line with the mega-cap group
Alphabet goes into the print at 24.7x forward and 26.6x trailing earnings. On forward earnings that is essentially the mega-cap peer median of 24.1x: below Apple at 36.2x and Amazon at 28.0x, and above Microsoft and Meta Platforms at about 20x each. On forward EV/EBITDA it trades at 23.9x, toward the upper end of the group, against a 17.8x median. That is a full multiple rather than a cheap one, but Alphabet carries the fastest revenue growth in the set, at about 21% this year, and the Cloud franchise still has optionality the multiple does not fully price. The nearest catalyst that can move it is the 22 July print, where the Cloud growth rate and the capex path do the most to change the forward view.
| Company | Mkt cap (US$bn) | P/E (TTM) | P/E (Fwd) | P/B | EV/Sales (TTM) | EV/Sales (Fwd) | EV/EBITDA (TTM) | EV/EBITDA (Fwd) |
|---|---|---|---|---|---|---|---|---|
| Apple (AAPL) | 4,660.4 | 38.3x | 36.2x | 43.8x | 10.4x | 9.9x | 29.4x | 27.3x |
| Microsoft (MSFT) | 2,904.4 | 23.2x | 20.1x | 7.0x | 9.4x | 7.8x | 14.9x | 14.9x |
| Amazon (AMZN) | 2,660.3 | 29.1x | 28.0x | 6.0x | 3.7x | 3.4x | 14.7x | 20.6x |
| Meta Platforms (META) | 1,667.1 | 23.5x | 20.0x | 6.8x | 8.0x | 6.8x | 15.3x | 15.0x |
| Median (All Peers) | 26.3x | 24.1x | 6.9x | 8.7x | 7.3x | 15.1x | 17.8x | |
| Alphabet (GOOGL) | 4,263.6 | 26.6x | 24.7x | 8.9x | 10.2x | 8.9x | 19.7x | 23.9x |
Source: FMP market data and consensus estimates, Zero One Investment Research. Prices as of 14 Jul 2026. Forward multiples use each company's next unreported fiscal year (FMP consensus).
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