Alphabet raises AI capex guidance to $205bn as cloud revenues surge 82%
The tech giant reported $119.8 billion in Q2 revenue, with cloud growth significantly outpacing rivals Amazon and Microsoft, but the increased spending outlook has tempered market enthusiasm.
Alphabet reported second-quarter 2026 earnings on July 22, posting a 24 per cent year-on-year revenue increase to $119.8 billion, surpassing analyst estimates of $116.9 billion. The results were driven by a 82 per cent surge in cloud revenues, which significantly outpaced consensus estimates of 63 per cent and growth rates recorded by rivals Amazon and Microsoft. Google Search revenues grew 17 per cent year-on-year, slightly below expectations, while YouTube ad revenues rose 13 per cent, beating estimates.
Despite the strong top-line performance, shares declined as investors reacted to the company’s revised capital expenditure guidance. Alphabet raised its 2026 capex budget to between $195 billion and $205 billion, an increase of $15 billion from previous guidance. The company cited margin pressure resulting from the use of third-party compute capacity to address demand-supply mismatches in artificial intelligence infrastructure.
The cloud order backlog, which includes chips, rose by over $50 billion compared to the first quarter, surpassing $500 billion. Alphabet began delivering tensor processing units (TPUs) to customer data centres in the second quarter and expects the vast majority of revenues from existing TPU agreements to be realised next year.
CEO Sundar Pichai highlighted optimism regarding the upcoming Gemini 4 model, describing it as ambitious and noting significant investment in compute and effort to compete at the frontier level. While management did not provide specific guidance for the 2027 budget, the tone of the earnings call suggested that spending levels may remain elevated to support AI development.
The stock is currently trading at a forward price-to-earnings multiple of 24.5x, having corrected from its 2026 highs. The market’s reaction indicates that investors are prioritising near-term margin stability over top-line growth, given the substantial increase in infrastructure spending required to sustain the company’s cloud and AI ambitions.
