BofA reiterates Buy on Alphabet as Cloud and AI demand support raised forecasts

Overview

This is a Bank of America 2Q26 earnings preview and forecast upgrade report on Alphabet. The report believes Alphabet will demonstrate strong momentum in Search advertising, Cloud, and AI infrastructure demand, with Cloud backlog and AI compute demand in particular supporting upside to revenue and margins. BofA reiterates its BUY rating and 430.00 USD target price.

Core views

The core views are: first, although Search growth is affected by FX and softness in areas such as travel and CPG, retail search and ad checks remain healthy, with 2Q Search growth expected at about 17%. Second, Cloud demand is strong; BofA raises its 2Q Cloud revenue growth expectation to 70% and believes backlog revenue over the next 8 quarters will total at least USD 230bn. Third, the revaluation of the Anthropic equity stake brings a one-time gain, leading to a significant increase in 2026E EPS. Fourth, high capital expenditure and AI competition may weigh on some market sentiment, but Alphabet still has advantages in the combination of models, in-house TPUs, consumer distribution, and enterprise distribution.

Analysis framework

The report uses an earnings preview framework, combining channel checks, ad surveys, Cloud backlog, AI token cost indices, comparisons with Street consensus, segment revenue and margin forecasts, capex and FCF calculations, and a valuation framework based on 2027E EPS to assess Alphabet.

Methodology notes

• Earnings previewComparison of BofA estimates with Street consensus

  Compare 2Q26 and 3Q26 revenue, EPS, Search, YouTube, Cloud, and other core metrics with market expectations.

  This method is used to judge whether pre-earnings market expectations have already fully reflected Cloud acceleration, Search resilience, and cost pressures.

• Segment operating analysisForecasts for Search, YouTube, and Cloud segments

  Break down revenue growth, margins, demand signals, and competitive pressures by business line.

  The report primarily uses Cloud acceleration and Search stability as key support for raising valuation and rating, while also identifying risks from slowing YouTube growth and ad budget migration.

• Valuation methods2027E EPS multiple valuation

  The target price of 430.00 USD is based on 28x 2027E EPS.

  The report also references Alphabet's current valuation of about 25x 2027E GAAP EPS, its 10-year historical range of 14x-30x, and its premium relative to the S&P 500.

• Fundamental qualityiQmethod SM - Quality of Earnings / Business Performance

  Focus on cash realization, asset replacement, tax rate, net debt-to-equity, ROCE, ROE, operating margin, and FCF.

  These metrics are used to assess earnings quality, capital intensity, and cash flow pressure under high AI-related capital expenditure.

Asset mapping & comparison

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

• GOOGL.US

  Core covered asset

  Strengths

  The Search advertising base remains stable, Cloud growth is strong, and in-house TPUs, Gemini, consumer distribution, and enterprise distribution form differentiated AI assets.

  Weaknesses

  Capital expenditure is rising significantly, free cash flow is declining, and equity financing plus potential issuance may affect capital returns.

  Comparison

  The report believes Google Cloud 2Q26 IaaS growth is about 79%, above assumed growth of about 40% for Azure and about 31% for AWS.

  Risks

  Overly high Cloud expectations, OpenAI's push into advertising, new LLM competition, AI talent attrition, concerns about capex ROI, and valuation above historical levels.

• GOOG.US

  Another traded share class of the same company

  Strengths

  Shares the same Alphabet fundamentals and valuation drivers as GOOGL.

  Weaknesses

  The report's main data presents both GOOG and GOOGL prices and target prices, but the core investment conclusion is the same.

  Comparison

  GOOG's share price of about USD 370 implies about 25x 2027E GAAP EPS, within the 10-year historical range of 14x-30x.

  Risks

  Same as GOOGL, including AI competition, Cloud growth delivery, and capital expenditure efficiency.

Key data

• Rating and target priceBUY; PO 430.00 USD; Price 370.92 USDThe report reiterates the buy rating, with the target price based on 28x 2027E EPS.
• 2Q26 revenue and EPS forecastRevenue USD 102.1bn; GAAP EPS USD 8.38Above Street revenue of USD 101.0bn and EPS of USD 2.90.
• 2026E forecast revisionRevenue USD 427bn; EPS USD 19.70Revenue raised 1% and EPS raised 36%, mainly driven by Cloud and gains from the Anthropic revaluation.
• 2027E forecast revisionRevenue USD 537bn; EPS USD 14.70Revenue raised 3% and EPS raised 1%.
• Cloud revenue forecast2Q26 Cloud revenue USD 23.2bn; YoY growth 70%Above Street expectations of about USD 22.5bn and 65% growth.
• Cloud margin2Q26 Cloud operating profit USD 7.7bn; margin 33.0%Above Street expectations of about USD 7.0bn and 31% margin.
• Search revenue forecast2Q26 Search revenue USD 63.6bn; YoY growth about 17%Slightly above Street at USD 63.3bn, with FX tailwinds expected to weaken versus 1Q.
• YouTube advertising revenue forecast2Q26 YouTube advertising revenue USD 10.8bn; YoY growth about 10%Roughly in line with Street, but the report notes that growth may slow due to budget shifting toward Search.
• Capital expenditure forecast2Q capex USD 50.1bn; FY26 capex about USD 196bnBofA believes the company may raise FY26 capex guidance by about 5% to USD 190bn-200bn.
• Free cash flow2Q FCF USD 1.4bn; FY26 FCF about USD 18bnHeavy AI infrastructure investment is driving a clear YoY decline in FCF.

Impact & implications

The report has a positive implication for Alphabet's share price: if Cloud revenue, margins, and AI-related disclosures exceed expectations, it could strengthen market confidence in Alphabet's AI infrastructure and Cloud monetization capabilities; however, if capital expenditure is revised upward again, Cloud backlog disappoints, or the Search AI transition affects click-through rates and monetization, valuation multiples could come under pressure.

Risks

• 3Q faces a tougher YoY base, and Search as well as overall growth may slow.
• Cloud revenue expectations are high; if the degree of acceleration or backlog falls short of expectations, market reaction could be negative.
• 2026 capital expenditure guidance may be raised further to USD 190bn-200bn, triggering investor concerns about ROI and capital efficiency.
• Competition from OpenAI, Anthropic, and other new models and advertising products may affect AI sentiment and valuation multiples.
• AI talent attrition, delayed release of Gemini 3.5 Pro, and external compute trading costs may create execution risks.
• YouTube advertising may be affected by weak brand budgets, substitution from subscriptions, and budget migration toward Search.
• Valuation is elevated relative to historical averages and the premium to the S&P 500; if the market shifts toward concern over AI capex, multiples may contract.

What to watch

• Comments after the July 22 2Q earnings release on Search growth, ad pricing, and AI search usage.
• Cloud revenue growth, Cloud margins, backlog, and disclosures on large AI contracts.
• FY26 and FY27 capex guidance, capacity expansion plans, and explanations of capex ROI.
• External TPU monetization model, including whether revenue is included in backlog, recognized on a net or gross basis, and associated margins.
• Reasons for the Gemini 3.5 Pro delay, the Gemini 4 release timeline, and rollout of AI agent capabilities.
• Hiring and retention strategy following AI talent attrition.
• 3Q advertising market conditions, FX impact, and risks of slowing Search/YouTube growth.