Forget AI Capex Concerns - Buy Alphabet After Excellent Q2 Earnings

The undisputed global leader of Internet search engine and artificial intelligence (AI)-powered cloud giant Alphabet Inc. GOOGL came up with solid second-quarter 2026 earnings results, easily surpassing the Zacks Consensus Estimate with respect to both the top and bottom lines.

However, the stock price of GOOGL took a southward direction on concerns of a sharp increase in AI capital expenditure (capex). This concern is uncalled for as Alphabet has started monetizing its AI expenditures. 

Moreover, the highly competitive AI space is changing its character day to day. AI product’s life cycle is extremely short, and for that corporates need to pump money continuously to introduce upgraded and innovative products to stay competitive.

Alphabet raised its 2026 capital expenditure guidance to $195-$205 billion from $180-$190 billion. The increase reflects accelerated capacity deployment to meet demand for AI infrastructure and Cloud services. GOOGL expects capital expenditures to increase significantly again in 2027.

The chart below shows the price performance of GOOGL year to date.

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AI Monetization Starts

In second-quarter 2026, Google Search & other revenues climbed 17% year over year to $63.27 billion, primarily due to the fact that AI-powered Search experiences continued to drive query growth. AI Mode surpassed one billion monthly active users after its global expansion.

Google Cloud revenues hit $24.77 billion, soaring 82% year over year. Cloud operating income more than tripled to $8.81 billion and operating margin expanded to 35.6% from 20.75 in the year-ago quarter. 

The solid performance was driven by Google Cloud Platform, enterprise AI solutions, AI infrastructure and core services. The company also began recognizing revenues from tensor processing unit (TPU) system sales to customer AI-powered data centers.

CEO Sundar Pichai said that the jump in cloud revenues was "driven by demand for AI infrastructure and AI solutions." Investors should remember that this division turned profitable only in early 2023. 

Alphabet’s AI Adoption Accelerates 

Alphabet continues to benefit from investments in infrastructure, security, data management and analytics, along with its partnership with NVIDIA Corp. NVDA and a growing global footprint of cloud regions and availability zones. 

Google Cloud’s differentiated full-stack AI approach strengthens Alphabet’s competitive positioning. The company integrates its own infrastructure — TPUs and GPUs (graphics processing units) — proprietary AI models (Gemini), and data platforms (like BigQuery) into a unified offering. 

This vertical integration enhances performance, lowers costs and creates higher switching barriers for enterprise customers. As a result, Alphabet is winning larger deals, accelerating customer acquisition, and deepening relationships, all of which reinforce long-term growth potential.

In the last reported quarter, Gemini model APIs processed roughly 22 billion tokens per minute, up from more than 16 billion in the previous quarter. The Gemini app reached 950 million monthly active users, with daily active users tripling year over year. 

Alphabet also reported strong adoption of Gemini-powered advertising tools, including AI Max and Performance Max. Management remained encouraged by monetization on queries featuring AI Overviews and continued testing new ad formats within AI Mode.

Solid Estimate Revisions and Price Upside

For 2026, the Zacks Consensus Estimate currently shows revenues of $430.67 billion, suggesting an improvement of 25.6% year over year and earnings per share of $17.81, indicating an increase of 64.8% year over year. The Zacks Consensus Estimate for the current year has improved 21.3% in the last seven days.

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The short-term average price target of brokerage firms represents an increase of 36% from the last closing price of $319.74. The brokerage target price is currently in the range of $365-$515. This indicates a maximum upside of 61.1% and no downside. 

Investment Thesis

Alphabet currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. GOOGL represents a rare opportunity to invest in a company with proven execution and substantial unrealized potential in the AI revolution. 

The astonishing growth potential of the global AI-powered cloud market and its strong guidance and business visibility offer near-term potential. At this stage, it will be prudent to buy GOOGL. Hold this stock for the long term as the company’s extensive AI thrust will generate more value. 

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This article originally published on Zacks Investment Research (zacks.com).

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