Alphabet Q2’26 Initial Earnings Take: Advertising and Cloud Both Beat Expectations, with Returns on AI Investment as the Key Focus

Overview

This report is Goldman Sachs’ First Take on Alphabet Inc.’s Q2’26 results. Goldman Sachs believes Alphabet’s initial results should prompt a moderately positive market reaction, primarily because revenue from Search, YouTube Ads, and Cloud all exceeded forecasts. Google Cloud growth was particularly well above expectations and demonstrated that AI-related capital expenditure is translating into better returns on capital.

Core views

The report’s core views are: first, Search achieved 17% year-over-year growth despite its mature business base, helping to ease concerns about AI disrupting the traditional search business model; second, Google Cloud revenue grew 82% year over year, significantly above Goldman Sachs’ and market expectations, while a segment GAAP EBIT margin in the mid-30% range strengthens the evidence of returns on AI investment; third, the company did not update its 2026 capital expenditure forecast in the release or provide a capital expenditure framework for 2027 and beyond, so AI-related capital expenditure will remain one of investors’ primary areas of focus.

Analysis framework

Goldman Sachs evaluates Q2 performance by comparing reported results with its own forecasts and Visible Alpha consensus estimates, and breaks down revenue and profit performance across Search, YouTube Ads, Network, Google Cloud, Subscriptions/Platforms/Devices, and Other Bets. For valuation, the 12-month target price of $440 is based on an equal-weighted blend of EV/GAAP EBIT valuation and a modified DCF, together with an EV/FCF-SBC multiple framework.

Methodology notes

• Valuation methodsEqual-weighted blend of EV/GAAP EBIT and modified DCF

  Target price calculation

  Goldman Sachs’ $440 12-month target price is based on an equal-weighted blend of applying EV/GAAP EBIT to NTM plus one-year forecasts and using a modified DCF; the report also refers to applying an EV/FCF-SBC multiple to NTM plus four-year forecasts.

• Factor analysisGS Factor Profile

  Growth, financial returns, valuation multiples, and composite percentile

  The Goldman Sachs Factor Profile evaluates growth, financial returns, valuation multiples, and composite percentile by comparing key characteristics of individual stocks with the market and industry peers. Growth is based on forward sales, EBITDA, and EPS growth; financial returns are based on ROE, ROCE, and CROCI; valuation multiples are based on metrics including P/E, P/B, P/D, EV/EBITDA, EV/FCF, and EV/DACF.

• M&A scenarioM&A Rank

  Probability score for potential acquisition

  Goldman Sachs assesses the likelihood of covered companies becoming acquisition targets on a scale of 1 to 3, with 1 representing high probability, 2 medium probability, and 3 low probability; when the rating is 1 or 2, M&A factors may be incorporated into the target price.

Asset mapping & comparison

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

• Alphabet Inc. / GOOGL.O

  Core covered asset

  Strengths

  Search and YouTube advertising exceeded expectations, Google Cloud grew rapidly with strong margin performance, and overall revenue and operating profit support a positive market reaction.

  Weaknesses

  The company did not update its 2026 capital expenditure forecast or provide a capital expenditure framework for 2027 and beyond, leaving the intensity of AI investment and long-term returns to be validated.

  Comparison

  Consolidated revenue exceeded Goldman Sachs’ and Visible Alpha consensus expectations; Google Cloud growth also exceeded Goldman Sachs’ previous forecast, which was already above market expectations.

  Risks

  Competition for product utility and advertising budgets, industry disruption affecting search monetization, shifts in media consumption habits, heavy investment weighing on margins, insufficient shareholder returns, and regulatory scrutiny.

• Google Cloud

  Key growth engine

  Strengths

  Revenue grew 82% year over year, significantly above Goldman Sachs’ forecast of 72%, while a GAAP EBIT margin in the mid-30% range strengthens the evidence of returns on AI investment.

  Weaknesses

  Rapid growth requires continued capital expenditure support, while future investment intensity and the trajectory of returns remain investor concerns.

  Comparison

  Growth was significantly faster than Goldman Sachs’ estimates and market expectations.

  Risks

  AI infrastructure investment may continue to rise; if returns materialize more slowly than expected, margins and free cash flow could be pressured.

• Google Search & Other

  Advertising base

  Strengths

  Revenue grew 17% year over year, demonstrating resilience in a mature business and helping to ease concerns about AI disrupting the search business model.

  Weaknesses

  Over the long term, it remains exposed to changes in AI search formats and the impact of industry disruption on monetizable search traffic.

  Comparison

  Revenue exceeded Goldman Sachs’ forecast.

  Risks

  Improved utility of competing products, shifts in advertising budgets, and AI changing the search entry point could affect long-term monetization.

Key data

• Q2 consolidated revenue$119.80bnAbove Goldman Sachs’ forecast of $117.04bn and Visible Alpha consensus of $117.17bn, up 24% year over year.
• Google Search & Other revenue$63.27bnUp 17% year over year, remaining outstanding despite the mature business backdrop.
• YouTube Ads revenue$11.10bnUp 13% year over year and above Goldman Sachs’ forecast.
• Google Cloud revenue$24.77bnUp 82% year over year, above Goldman Sachs’ forecast of 72% year-over-year growth.
• Q2 GAAP operating profit$40.77bnAbove Goldman Sachs’ forecast of $38.78bn and close to market expectations of $40.80bn; GAAP operating margin was 34%.
• Q2 GAAP EPS$9.11Above Goldman Sachs’ forecast of $2.59 and market expectations of $2.90, but including a one-time equity securities gain of $99bn.
• 12-month target price$440The target price is based on an equal-weighted valuation framework combining EV/GAAP EBIT and a modified DCF.
• Price disclosed in the report$347.15Alphabet Inc.’s price is listed as $347.15 in the company-specific disclosure.

Impact & implications

The impact on Alphabet’s share price and investment narrative is moderately positive: the advertising base remains resilient, while rapidly growing Cloud revenue and supporting margins help demonstrate that prior AI capital expenditure is not merely a cost burden. However, investors will continue to focus on the scale of future capital expenditure, external financing needs, Gemini’s competitiveness, AI talent attrition, regional and industry trends in advertising demand, and how the company balances efficiency, growth investment, and capital returns.

Risks

• Intensifying competition in product utility and advertising budgets.
• Industry disruption could create headwinds for monetizable search businesses.
• Changes in media consumption habits could affect ad distribution and the allocation of user time.
• Heavy investment could cause operating margins to fall below Goldman Sachs’ forecast and remain pressured for longer.
• Insufficient or below-expectation new shareholder returns.
• Regulatory scrutiny and changes in industry practices could alter the business model outlook.
• Gemini’s competitive positioning and AI-related personnel attrition are company-level issues requiring near-term attention.

What to watch

• Management commentary on AI capital expenditure trends and the future return-on-investment curve during the upcoming earnings call.
• Whether external debt or equity capital will be needed to support AI-related capital expenditure.
• Management responses regarding Gemini’s competitive positioning and AI talent attrition.
• Changes in digital advertising demand by industry and region, as well as the company’s commentary on future trends.
• How the company balances cost efficiency, growth investment, and capital returns.
• Whether the 2026 capital expenditure forecast is updated and whether a capital expenditure framework for 2027 and beyond is clarified.