Alphabet's Stock Slipped 2.2% After Sundar Pichai's Earnings Beat Was Inflated by a $77.1 Billion Unrealized Gain on Equity Holdings. Should Investors Discount That Gain When Judging the Real Growth Story?

Accounting is complicated, which is why quarterly and annual reports are so long and boring to read. But when you see a company like Alphabet (NASDAQ: GOOG) reporting that its second-quarter earnings benefited from $77.1 billion in unrealized gains, you have to pause for a second. That's a huge number, but what does it really mean for the business?

Google's investments did well in the second quarter

Earnings are a snapshot, and generally accepted accounting principles (GAAP) make the final earnings number a lot more complicated than you'd hope. Unrealized gains are one of the many complications that investors have to deal with. Normally, unrealized gains aren't such a big deal, but sometimes they can be. When the gain is $77.1 billion, it needs extra attention.

Image source: Alphabet Inc.

Essentially, Alphabet has been investing in other companies. It does so to get access to technological advances, so this effort probably makes a lot of sense for the business. CEO Sundar Pichai isn't doing anything wrong here. But the value of those investments changes, just like the value of any public company.

GAAP accounting rules require a company to include the change in the value of investments in earnings. But you can't count on big gains every single quarter. For example, in the second quarter of 2025, the gain on securities was $1.3 billion. These gains are lumped into "other" income, with the second-quarter 2026 "other" income leaping to nearly $98 billion from roughly $2.7 billion a year earlier.

To put the impact of that year-over-year change into perspective, in the second quarter of 2025, Alphabet's net income was just over $31 billion. That's much larger than the $2.7 billion in "other" income it reported. Not a big deal. In the second quarter of 2026, however, the technology giant's net income was $41 billion, or less than half the $98 billion of "other" income it reported. A very big deal.

Alphabet isn't doing anything wrong, but you can't ignore "other" income

There's nothing nefarious going on here; Alphabet is just working within GAPP accounting rules. But you have to understand the impact of its investment gains on earnings. Essentially, earnings were greatly inflated in the second quarter of 2026. That's good news, for now.

The company, however, is very clear: "Fluctuations in the value of our investments may be affected by market dynamics and other factors and could significantly contribute to the volatility of OI&E [other income and expenses] in future periods." The company is telling you that you can't count on these gains, and they could even turn negative if Alphabet's investments decline in value. In other words, they have little to do with the business's underlying growth story.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.