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- Revenue increased by 24% to hit $119.8 billion, more than the $117 billion expected by Yahoo Finance analysts
- YouTube ad revenue rose 13% to $11.1 billion
- Shares fell by 4% in after-hours trading
For several quarters now, Alphabet would say that it needed to pour even more money into its investment into artificial intelligence. Wall Street would, counterintuitively, reward the Google's parent with a higher stock price.
That changed on Wednesday after Alphabet increased its 2026 capital expenditures from its previous estimate of $180 to 190 billion to $195 to 205 billion, citing that it needed to increase spending on its AI products in order to keep up with the growing demand.
The move spooked investors, who sent shares down as much as 4% in after-hours trading.
The reaction is part of a broader reassessment by Wall Street -- and companies in general -- about the cost and return on investment from AI. It also comes at a time when those expenses are rising as demand for more infrastructure is causing a strain in the supply of chips that are leading to higher prices from everything to MacBooks to televisions.
The higher capex forecast dampens enthusiasm over otherwise strong results, with revenue hitting $119.8 billion during the second quarter. Net income increased by 298% to $112.1 billion a share, helped by a massive one-time equity benefit of $98 billion. Excluding that, Google's net income fell from a year earlier. Operating income rose 30.4% to $40.8 billion from a year ago, a metric that may better reflect how the company 's core business did during the quarter.
Increases in Google Services and Google Cloud led to the strong quarter. On the Google Services side, revenue increased by 15% overall to hit $94.5 billion. That was driven by 17% growth in Google search and other, a 15% increase in Google subscriptions, platforms and devices and a 13% uptick when it comes to YouTube ads, which totaled $11.1 billion.
As for Google Cloud, the offering saw a revenue increase of 82% to hit $24.8 billion. That was led by an increase in the Google Cloud Platform across enterprise AI solutions and enterprise AI infrastructure.
Though AI is in vogue right now, investors and businesses alike are reconsidering whether these high costs are worth the return. The fanfare around AI has started to die down as more companies, like Uber, have revealed that AI tokens have not actually saved them money compared to human labor.
Unlike other major tech players, Alphabet's stock has stayed consistently high, rising about 4% over the past three months. Amazon's stock has stayed flat during this time period while Meta's stock has declined by almost 6% and Microsoft's has dropped by 5%.
AI growth led to the strong quarter
To give you a sense of scale, here are some key numbers:
- There are 1 billion monthly active users of its Gemini AI tool
- Gemini's API model processes 22 billion tokens per minute
- More than 9 million developers each month build with Gemini
A major reason why Alphabet has had so many impressive quarters consecutively has to do with the company's investment in AI. Artificial intelligence has long been a big part of the company, but the company used its second-quarter earnings call to really flex how well it's been doing when it comes to this technology.
For example, Gemini's API model now processes 22 billion tokens per minute, up from 16 billion tokens per minute last quarter. Also, Omni, the AI video creation part of Gemini, has led to a 40% increase in daily active users for the Gemini app. Speaking of the Gemini app, the offering now has 950 million monthly active users, and this quarter, the company was able to reduce the cost of AI mode responses to their lowest since launch.
An AI model war is afoot
In recent years, the AI landscape becomes more competitive with more advanced models coming from outside of America. During the call, Google CEO Sundar Pichai was asked directly about his strategy regarding a looming AI model war.
"We want to make sure that, for our customers, we are offering the best models at various price points," Pichai said. "It's very important to us to have the best frontier models out there as well as models which are very performant and low cost."
The comments come after Chinese startup Moonshot AI made waves with Kimi K3, an open source AI model that rivals the best in the industry.
On the best-of-the-best model front, Pichai emphasized that the company is putting "a lot of effort" in Gemini 4. Alphabet wants the model to be the best AI model on the market when it comes out. Once that model is released, iterations on it are planned to be released on nearly a monthly basis.
"We are applying a lot of our compute and effort in that direction," he said. "But with that, we are creating a baseline on which you will see us rapidly iterate with subsequent model releases, so picking a pace and releasing models or [where] almost at a monthly cadence is part of our roadmap as we are building Gemini 4."
YouTube subscriptions is still outpacing ads
Last quarter, the company reported that YouTube subscriptions outpaced its advertising division. That remained the case this quarter. YouTube Music and YouTube Premium have largely driven this growth as has YouTube's growing presence in the living room. Internally, the company is using Gemini to better serve consumers on these subscriptions.
"Strong performance in search and YouTube underscores how our investments in AI translate into measurable value for users and advertisers," Philipp Schindler, senior vice president and chief business officer at Google, said on the call.
The company also touted its shopping option that allows viewers to shop directly from their television. Though no specific numbers were given, Schindler noted that YouTube Shorts are continuing to deliver "high-performing opportunities for social and video buyers" and that, when it comes to monetization across YouTube, the company is driving "sustained growth across our key priorities."
AI is driving a capital expenditure increase
The big news of the call was the fact that Alphabet increased its capital expenditure guidance range for 2026 by $15-25 billion.
"The increase in the range is primarily due to an acceleration in the delivery of capacity to meet growing demand," Ruth Porat, president and chief investment officer of Alphabet, said during the call. She also noted that Alphabet told shareholders it expects the CapEx to increase "significantly in 2027" and that more details would be provided at a later date.
When pressed on this major change, Pichai likened the interest Alphabet is seeing around its AI product to the boom it once saw around Google Cloud. He also said that he feels the company is in the "early innings" of major shift that will be driven by AI.
"When we used to talk about Cloud itself, very few, a very small percentage of overall workloads and enterprises had shifted to Cloud. Now think about what percentage of workloads should be a really AI native and AI enabled. It again feels very, very early," Pichai said. "If anything, over the past year, we've gotten more bullish on the opportunities ahead … In my conversations with many CEOs, many companies, they're all still barely scratching the early stages of what's possible here."
"Our goal is to invest as long as we see an attractive return on that investment, as Sundar mentioned earlier. We do take a long-term view, so we take multi-year view at what the needs are, as well as focus on next year and the near term and building aggressively to meet those demands," Porat said. "As you've seen, we have increased our capacity quite significantly over the past three years. The demand still outpaces that investment."
The post Alphabet's AI Costs Keep Spiraling Higher appeared first on TheWrap.
