Alphabet 2Q26 results show strong AI cloud demand, and raised capex is positive for the AI infrastructure supply chain

Overview

This report is Nomura's quick interpretation of Alphabet's results for the second quarter of 2026 in its Global AI Trend Tracker. The report focuses on Alphabet's better-than-expected results, Google Cloud's high growth driven by demand for AI infrastructure and AI solutions, increased usage of AI products, the start of external TPU deliveries, and how FY26E and 2027E capex outlooks may transmit to China's AI hardware supply chain.

Core views

The core view is that Alphabet continues to step up investment in AI infrastructure, while Google Cloud demand and backlog remain strong and usage of AI models, applications, and development platforms is growing rapidly. This not only supports growth in Alphabet's cloud business, but also creates a positive read-through for upstream hardware chains such as optical modules and PCBs. Nomura believes companies such as Innolight, WUS PCB, and Victory Giant are likely to benefit from technology upgrades and expanding infrastructure spending over the next few quarters.

Analysis framework

The report uses an earnings read-through approach, combining Alphabet's 2Q26 financial performance, Google Cloud growth, capex composition, and management's FY26E/FY27E outlook, and then mapping these to the supply chains related to AI servers, data center networks, optical modules, PCBs, and TPUs. The report also cites consensus comparisons, company management commentary, Bloomberg, LSEG, and Nomura research data.

Methodology notes

• Earnings read-throughEarnings read-through

  Infer AI hardware supply-chain demand from Alphabet's capital expenditure and cloud business growth

  The report does not assign a formal rating to Alphabet, but instead assesses the degree of potential benefit to related supply-chain companies through its revenue, cloud business, AI usage, TPU shipments, and capex guidance.

• Relative ratingNomura equity rating system

  Buy/Neutral/Reduce relative benchmark rating system

  Nomura's Buy indicates the analyst expects the stock to outperform its relevant benchmark over the next 12 months; Not rated indicates it is outside regular research coverage.

• Valuation methodologyP/E multiple valuation

  Derive target price using forecast EPS and a target P/E multiple

  The report discloses that the target prices for WUS PCB, Zhongji InnoLight, and Victory Giant are all based on forecast EPS multiplied by a target P/E ratio, with reference to historical ranges, industry medians, or the company's own historical median.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Alphabet (GOOG US)

  Earnings subject; source of read-through for AI cloud and capital expenditure

  Strengths

  2Q26 revenue and Google Cloud growth beat expectations, AI application usage was strong, FY26E capex guidance was raised, and TPU deliveries to external customers began.

  Weaknesses

  2Q26 free cash flow was negative USD5.9bn, mainly dragged down by capex investment; use of third-party compute power may create mild pressure on short-term margins.

  Comparison

  2Q26 revenue was 2.4% above Bloomberg consensus, and Google Cloud revenue was 10% above consensus.

  Risks

  Capex efficiency, sustainability of cloud demand, third-party compute costs, pace of AI product monetization, and regulatory risk.

• Google Cloud

  Alphabet's core AI cloud business; a driver of supply-chain demand

  Strengths

  2Q26 revenue rose 81.8% YoY to USD24.8bn, backlog reached USD514bn, customer acquisition more than doubled YoY, and Marketplace transactions increased more than sevenfold YoY.

  Weaknesses

  In a supply-constrained environment, third-party capacity needs to be added as a transition, which may bring short-term margin pressure.

  Comparison

  Operating margin improved 2.6 percentage points QoQ to 35.6%, outperforming consensus expectations.

  Risks

  AI compute supply bottlenecks, fulfillment of customer commitments, cloud competition, and the pace of cost optimization.

• Zhongji InnoLight (300308 CH)

  A potentially benefiting optical module supply-chain company

  Strengths

  Listed by Nomura as Buy, benefiting from demand for high-end optical modules, AI data center network upgrades, and Google's continued AI infrastructure investment.

  Weaknesses

  High-end optical module demand may come in below expectations, competition in 400G/800G may intensify, 800G/1.6T upgrades may progress more slowly than expected, and price wars may affect exports.

  Comparison

  Target price of CNY1,325.00, based on 20x 2027F EPS of CNY66.06.

  Risks

  Demand for high-end optical modules, competition, product upgrades, price wars, and export risks with global customers.

• WUS Printed Circuit (002463 CH)

  A potentially benefiting PCB supply-chain company

  Strengths

  Listed by Nomura as Buy, with AI infrastructure, data centers, and networking equipment investment expansion expected to drive PCB demand.

  Weaknesses

  The disclosed target price is CNY86.8, while the table price is CNY114.23, so the implied relationship between target price and then-current share price requires cautious interpretation.

  Comparison

  Target price of CNY86.8, based on 38x 2026F EPS of CNY2.28; benchmark index is CSI 300.

  Risks

  Slower-than-expected growth in 5G base station PCB, weaker-than-expected data center demand, slower-than-expected upgrades in Intel and AMD networking products/platforms, and weaker-than-expected automotive demand.

• Victory Giant (300476 CH / 2476 HK)

  A potentially benefiting PCB supply-chain company

  Strengths

  Listed by Nomura as Buy, benefiting from AI PCB market upgrades and infrastructure spending in Google's supply chain.

  Weaknesses

  Supply-chain diversification by key customers and peer competition may pressure market share.

  Comparison

  Target price of CNY389.00, based on 27x 2027F EPS of CNY14.41, in line with the company's historical median P/E.

  Risks

  Customer supply-chain diversification, intensifying competition, technological changes such as COWOP, slower-than-expected AI PCB upgrades, and escalating geopolitical tensions.

Key data

• Alphabet 2Q26 revenueUSD119.796bn, up 24.2% YoY and 9.0% QoQ2.4% above Bloomberg consensus.
• Alphabet 2Q26 net profitUSD112.107bn, up 297.6% YoYThe sharp increase was partly attributable to higher other income from unrealized net gains on equity securities.
• Google Cloud 2Q26 revenueUSD24.8bn, up 81.8% YoY and 23.7% QoQ10% above consensus, with operating margin up 2.6 percentage points QoQ to 35.6%.
• Alphabet 2Q26 capital expenditureUSD44.9bn, up 100.1% YoY and 25.9% QoQAbout 60% was spent on servers, and about 40% on data centers and networking equipment.
• FY26E capex guidanceUSD195-205bnPreviously USD180-190bn; the midpoint of USD200bn implies 118.7% YoY growth.
• Google Cloud backlogUSD514bnDriven by demand for AI infrastructure and AI solutions.
• Google model API throughputabout 22bn tokens/minVersus 16bn tokens/min in the previous quarter.
• Gemini app monthly active users950mn MAUsDaily active users have tripled over the past year.
• Gemma downloadsMore than 900mn for the Gemma series, and more than 300mn for Gemma 4 since its April launchReflecting the spread of the open-source/open model ecosystem.
• Antigravity weekly active usersmore than 2.4mn weekly active usersA usage metric for the agentic development platform.
• External TPU deliveriesFirst delivery of TPU systems to customer data centers in 2Q26Management expects a small amount of revenue to be recognized this year, with the vast majority of contracted revenue to be realized in 2027E.

Impact & implications

In terms of investment implications, Alphabet's continued increases in AI compute investment, strong Google Cloud customer demand, and the externalization of TPU systems all reinforce the view that AI infrastructure spending remains in an expansion phase. In the short term, third-party compute capacity as a bridging solution may place mild pressure on Alphabet Cloud margins; in the medium term, servers, data centers, networking equipment, optical modules, and the PCB chain still have catalysts from orders and product upgrades.

Risks

• Alphabet's continued capex expansion may depress free cash flow.
• Third-party compute power as a transitional solution may place mild pressure on Google Cloud's short-term margins.
• If AI infrastructure demand falls short of expectations, orders for optical modules, PCBs, and the data center supply chain will be affected.
• If upgrades of high-end optical modules and AI PCB products proceed more slowly than expected, the growth potential of supply-chain companies may weaken.
• Price wars, customer supply-chain diversification, and geopolitical tensions may affect orders and margins for Chinese supply-chain companies.
• The report rates Alphabet as Not rated, and investors should not interpret this as Nomura's formal coverage rating on Alphabet.

What to watch

• Whether Alphabet's actual capex execution in subsequent quarters will meet the FY26E guidance of USD195-205bn.
• Further quantification by management of the significant increase in 2027E capex.
• Trends in Google Cloud backlog, revenue growth, and operating margin.
• The pace of revenue recognition for TPU system sales agreements in 2027E.
• Whether usage of AI products such as Gemini, Gemma, model APIs, and Antigravity can continue to grow and convert into commercial revenue.
• Verification of AI data center-related orders, product upgrades, and margins at Innolight, WUS PCB, and Victory Giant.