Alphabet reports third-quarter earnings on Oct. 28 after its shares fell roughly 6% following Q2 results. Investors want proof that Google Cloud growth and TPU chip sales justify its AI spending.
Alphabet reports third-quarter earnings on Oct. 28, and the Motley Fool's Patrick Sanders argues the company needs to show Wall Street a return on its AI spending. Google Cloud and the company's AI chip operation deserve particular attention, he writes.
Strong Q2 results, but shares still fell
Alphabet's second-quarter revenue increased 24% year over year to $119.8 billion, while operating income climbed 30% to $40.8 billion. Google Cloud generated $24.8 billion in revenue, up from $13.6 billion a year earlier.
Investors were not entirely satisfied, however, particularly after Alphabet raised its capital expenditure guidance again. Shares fell roughly 6% following the report.
Capex roughly doubles as free cash flow comes in negative
Alphabet spent $44.9 billion on capital expenditures in the quarter, roughly double its spending a year earlier. Management also raised its full-year capex forecast by $15 billion, to between $195 billion and $205 billion.
That spending is putting pressure on cash flow. Alphabet reported negative free cash flow of $5.9 billion in the second quarter, even though operations generated substantial cash.
Google Cloud needs to deliver more
Cloud has accelerated during 2026. Its revenue rose 63% year over year in the first quarter before jumping 82% in Q2, and Cloud operating income more than tripled to $8.8 billion.
But Google Cloud still lags Amazon Web Services in revenue. AWS generated $42.23 billion in net sales in the second quarter, and Amazon's stock jumped after its Q2 report even though the company also raised its capex guidance.
TPU sales add a new revenue line
Alphabet designs custom Tensor Processing Units (TPUs) and is increasingly turning them into a commercial business. Google began recognizing revenue from direct TPU chip sales during the second quarter.
Alphabet does not report TPU revenue separately, so management's commentary on customer demand and chip sales matters more. Sanders says Alphabet needs to demonstrate that Cloud can sustain its momentum, that its chip business is attracting customers, and that its infrastructure investments are producing attractive returns.
Source: The Motley Fool
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