Alphabet's latest quarterly report showed exceptional growth in its cloud business, but investor attention focused on a delayed flagship AI model and an increased capital expenditure outlook for 2026. Following the announcement, Alphabet shares fell roughly 3% in after-hours trading.
Financial and business highlights
- Google Cloud revenue grew 82% in the quarter ended in June, reaching $24.8 billion, well above analysts' expected 64% growth.
- Advertising revenue totaled $81.6 billion, and overall revenue was $119.8 billion, both exceeding expectations.
- Adjusted earnings per share were $2.85, slightly below the analyst consensus of $2.89.
- For the first time in the company's history, Alphabet reported negative free cash flow for the quarter, burning $5.9 billion.
Higher capex guidance for 2026
CFO Anat Ashkenazi told analysts that Alphabet now expects capital expenditures of $195–205 billion for 2026, up from the previously guided $180–190 billion. Ashkenazi attributed the increase to persistent demand for capacity—despite substantial expansions over the past three years, market needs continue to outpace available capacity. She also said the company anticipates further significant investment increases in 2027.
Some analysts warned that raising capex while reporting negative free cash flow can send an unfavorable signal for a company historically viewed as a strong cash generator.
Gemini delay and competitive pressure
While Google Cloud has been one of Alphabet's biggest beneficiaries from AI adoption, the company has encountered a setback in its own model roadmap: the Gemini 3.5 Pro flagship model, scheduled for a June debut, was delayed. That postponement has put Google at a disadvantage in certain AI-assisted coding tools, as competitors such as Anthropic and OpenAI continue to roll out enterprise solutions, and Chinese open-source models gain strength.
CEO Sundar Pichai acknowledged there is room to improve in developer tooling and agent-based coding, but noted that testing of Gemini 3.5 Pro is underway and training of Gemini 4 has already begun.
TPU chip sales
For the first time, Alphabet recorded revenue from direct sales of its own TPU (Tensor Processing Unit) chips in the second quarter. These chips are positioned to compete with Nvidia GPUs in some use cases.
Why this matters
The results present a mixed picture: Google Cloud's rapid growth reinforces Alphabet's strategic position in AI infrastructure, while higher capex guidance and a historic negative free cash flow raise near-term financial concerns for investors. The delay of Gemini 3.5 Pro is notable because timely model releases matter in the fast-moving AI market; setbacks can translate into competitive disadvantage.
Market reaction
The market responded negatively to the report: Alphabet shares fell about 3% in after-hours trading.
Ancillary note
The report included—separately—a promotional mention of the WOOD & Company Investor Day 2026 investor conference, scheduled for September 9 at the Budapest Marriott Hotel in partnership with Portfolio. This item was presented as part of investor-communication material accompanying the coverage.
