Alphabet: Is the Stock a Buy on the Dip as Cloud Revenue Surges?
Key Points
Despite a strong report, investors pressed the sell button on worries about Alphabet's capex plans.
However, given the company's cost advantage, this is the right move to make for the long term.
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Despite delivering strong second-quarter results, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) shares sank following its results. The company upped its capital expenditures (capex) forecast, as it continues to plow money into AI infrastructure. The stock is still up 65% over the past year, although it's off more than 20% from its earlier highs this year.
Let's dive into the company's Q2 results and prospects, and why I think this is a great opportunity to buy the stock.
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Cloud revenue surges
Alphabet's cloud computing unit, Google Cloud, once again stood out in Q2. Revenue for the segment continued to accelerate, surging 82% to $24.8 billion. That compares to 63% growth in the first quarter, 48% growth in the fourth quarter of 2025, 34% growth in the third quarter of 2025, and 32% growth in Q2 of last year. Perhaps even more impressive, though, is the operating leverage that the unit has been seeing.
Google Cloud's operating income soared from $2.8 billion a year ago to $8.8 billion, a more than threefold increase. Its cloud backlog, meanwhile, rose from $462 billion at the end of Q1 to $518 billion. This includes both cloud agreements and orders for its Tensor Processing Units (TPUs).
The reason the stock sold off, though, is that Alphabet once again increased its capex budget. It now plans to spend between $195 billion and $205 billion on AI data center infrastructure this year, up from a prior forecast of $180 billion to $190 billion, as it remains capacity-constrained. Its original capex guidance was for between $175 billion and $185 billion for 2026. It also said that its spending on AI infrastructure will be significantly higher next year.
Alphabet's core Google Search business, meanwhile, saw revenue climb 17% to $63.3 billion. The integration of Gemini into its ad platform is helping improve ad quality and relevance. At the same time, AI-powered features are helping fuel more search usage. Its stand-alone Gemini app also now has more than 950 million monthly users.
YouTube continues to perform well, with ad revenue jumping 13% to $9.9 billion. Meanwhile, subscription (which includes YouTube, its Gemini App, cloud storage, and music) and device revenue rose 15% to $12.9 billion. Google Network revenue continues to be a weak spot, with revenue down nearly 1%.
Overall, Alphabet's total quarterly revenue increased by 24% to $119.8 billion, above the $116.9 billion consensus, as compiled by LSEG. Earnings per share (EPS) soared from $2.31 to $9.11, but that included a large gain on its Space Exploration Technologies holdings.
Image source: The Motley Fool.
Why Alphabet stock is a buy
While the market punished Alphabet for its capex plans, the company is clearly demonstrating that it is getting strong returns on its investments. Not only is Google Cloud revenue surging, but its segment operating margins have also greatly improved. At the same time, its AI investments are also helping drive strong growth within its Google Search business.
Given the cost edge the company currently has with its TPUs, the right move is to press its advantage and spend aggressively on AI infrastructure. This is the smart decision, regardless of how the stock reacts.
The stock currently trades at a forward price-to-earnings ratio (P/E) of around 22 times 2026 analyst estimates. That's an attractive valuation for a company that is the most complete AI player, especially given its large investments in SpaceX and Anthropic.
Alphabet remains well-positioned, and its growth prospects look bright. While it has faced some delays with its Gemini Pro 3.5 model due to wanting to improve its agentic coding features, it has the resources to catch up in this area. Meanwhile, what it has been best at is creating models that work well in the consumer space, which it can monetize better than any other company, given its distribution and ad network advantages.
I'd be a buyer of Alphabet stock on this dip.
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Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.
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