Alphabet, Google's parent company, dampened skepticism about artificial intelligence (AI) investments by posting second-quarter results that beat market expectations. Its core search and advertising businesses maintained steady growth, and the AI cloud business grew explosively. In addition, the company further raised its capital expenditure (CAPEX) plans, which signal AI infrastructure investment, reaffirming its stance to expand AI spending.
However, free cash flow (FCF) turned negative due to massive CAPEX. As the AI investment race extends, a new focus for the market will be how reliably the core business's cash generation can support expanding CAPEX.
On the 22nd (local time), Alphabet said second-quarter revenue rose 24% from a year earlier to $119.8 billion (about 177 trillion won). That beat the $116.9 billion consensus compiled by market data provider LSEG. Operating income was $40.77 billion (about 60 trillion won), up 30% year over year. Earnings per share (EPS) were $9.11, far above the market estimate of $2.89.
By business, AI cloud revenue growth stood out. Cloud revenue rose 82% year over year to $24.8 billion (about 37 trillion won). Core search revenue increased 17% to $63.3 billion (about 94 trillion won), and advertising revenue grew 13% to $81.63 billion (about 121 trillion won).
Alphabet Chief Executive Sundar Pichai said, "Second-quarter Alphabet revenue grew 24% year over year, and Google Cloud revenue increased significantly on the back of demand for AI infrastructure and AI solutions," adding, "Ninety percent of the Fortune 100 corporations use Gemini Enterprise."
AI investment will also expand further. Alphabet raised this year's CAPEX outlook to $195 billion–$205 billion from the previous $180 billion–$190 billion. Actual second-quarter CAPEX was $44.9 billion, about double a year earlier. This reflects increased investment driven by the expansion of AI data centers and computing infrastructure.
The results dispelled much of the skepticism in the market about AI investment. Investors had warned that if hyperscalers continued massive AI CAPEX, weakening cash generation in their core businesses could ultimately force them to cut back on investment. But the latest results confirmed a virtuous cycle in which AI investment led to increases in cloud revenue and profit.
Still, scrutiny of CAPEX sustainability is expected to continue. Operating cash flow this quarter was $39.1 billion, up about 41% year over year, indicating stronger cash generation in the core business. However, as the increase in CAPEX far outpaced the growth rate of operating cash flow, free cash flow (FCF) swung to a $5.9 billion deficit.
This does not mean investment capacity is immediately lacking, but if the AI investment race becomes prolonged, whether expanding CAPEX can be sustained solely with cash generated from the core business will likely become a key metric for investors to watch.
Thomas Monteiro, senior analyst at Investing.com, said, "The new capital expenditure increase is bad news for Alphabet," adding, "With interest rate hikes and a persistent supply-demand imbalance in AI infrastructure, the outlook that Alphabet can finance itself forever with cash flow alone is losing credibility."