Alphabet delivers Q2 beat with cloud revenue surging 82%, capex disappoints - update

Updated 16:54ET with comments from the earnings call, including adjusted EPS of $2.85 versus $2.91 estimates. 

Alphabet (GOOG) (GOOGL) shares are only fractionally higher as tepid capex and a miss on operating margin overshadowed a top- and bottom-line beat and an 82% surge in the company’s cloud revenue to a better-than-expected $24.8B, beating expectations by more than $2B.

“Our AI investments are redefining what’s possible across every part of our business,” said Alphabet CEO Sundar Pichai, noting the significant growth in its cloud business led by an increase in Google Cloud Platform across enterprise AI Solutions and enterprise AI Infrastructure.

Alphabet (GOOG) (GOOGL) generated $119.8B in revenue for the second quarter, an increase of 25% year-over-year and nearly $3B above estimates.

Within the company’s other businesses, “other bets,” which includes its Waymo unit, realized a modest 2.4% growth in revenue to $383M, though less than $401M estimates. YouTube broke its losing streak with 13% revenue growth, beating estimates of $10.81B. The search engine generated $63B in revenue, an increase of 17% from the same quarter last year.

“These outstanding results show that our differentiated, full-stack approach to AI is delivering real, measurable value for consumers, customers, and our partners globally,” Pichai added.

On the bottom line, net income more than tripled to $112.1M, or $9.11 per share. This does not compare to estimates of $2.91, however, as the figure includes nearly $99M gain from the June equity capital raise.  

On the company's earnings call with analysts, Alphabet (GOOG) issued adjusted EPS of $2.85, which is a miss from $2.91 expectations.

Accordingly, operating margin increased by 200 basis points to 34% but missed 40% expectations.

The company also reported 950M monthly average users for its Gemini app.

Despite a solid beat across most businesses and the explosive growth in its cloud business, the upward trajectory of the stock is being held back by Q2 capex, which came in at $44.92B, only slightly better than $44.15B estimates. Additionally, the company did not report backlog figures, which is pivotal to future revenue growth.

Analyst reaction: 

Seeking Alpha analyst Vinay Utham: On the face of it, GOOGL has delivered a strong operating quarter, headlined by Google Cloud. Consolidated revenue grew 24% year-on-year to $119.8 billion—a twelfth straight quarter of double-digit growth—with operating margin expanding two points to 34%, but the standout is Cloud, where growth accelerated to 82% (from 63% last quarter) to reach $24.8 billion, and segment operating margin jumped to roughly 36%, from around 21% a year earlier. I would caution against reading too much into the headline EPS of $9.11 (up 294%), however: it is heavily flattered by a roughly $99 billion unrealized gain on equity securities that alone added $6.26 per share, and on an operating basis EPS was closer to $2.85—which, in my view, is the figure that reflects the underlying business. The one blemish is free cash flow, which turned negative at –$5.9 billion as $44.9 billion of capital expenditure outstripped operating cash flow, a clear sign that the AI build is now visibly pressuring cash generation.

Seeking Alpha analyst Jonathan Weber, Investing Group Leader for Cash Flow Club: Alphabet did quite well during the second quarter, showing better-than-expected revenue growth and excellent profitability, although that was partially due to unrealized gains for its Anthropic investment. Operating income was up nicely as well, though, and the growth rate of Alphabet's cloud business jumped to an excellent level of more than 80%. While free cash flow turned negative due to GOOG's hefty investments, which can be seen as a negative, I think that the positives outweigh the negatives here—GOOG, at 24x this year's earnings, looks attractive.