A few weeks earlier, Alphabet (NASDAQ:GOOGL) put up a second quarter of 2026 that looks almost too good on paper. Diluted earnings per share hit $9.11, up 294%. But most of that leap came from a paper gain, and in the same quarter the company spent more on data centers than its operations brought in as cash.
Alphabet is the parent of Google. It makes most of its money selling ads across Search and YouTube, rents computing power and AI models to businesses through Google Cloud, and sells subscriptions and devices on top. Beyond its consumer reach, corporate alliances and enterprise deals across the 10 Stocks With New Strategic Partnerships Investors Should Watch highlight how tech giants, like Alphabet, are locking in enterprise demand. If you’ve searched for anything today, you’ve already touched its main profit engine. Is Alphabet’s AI spending spree building a wider moat, or just a bigger bill? The answer hinges on a business that, not long ago, was an afterthought.
Search Refuses to Fade
Google Services brought in $94.5 billion in Q2 2026, up 15%. Search & other, the core, delivered $63.3 billion, up 17%. That’s a decades-old business still growing at double digits, during the very stretch when chatbots were supposed to eat its lunch. CEO Sundar Pichai credited AI features with driving growth in search queries.
The real edge is reach. Pichai said the Gemini app now has 950 million monthly users, and nearly 90% of the Fortune 100 have adopted Gemini Enterprise. Few companies can put a new model in front of that many people this quickly, setting up a head-to-head battle examined in Microsoft vs. Alphabet: Which AI Cloud Stock Is Cheaper After the Capital Spending?
Cloud Grows Up
Here’s the business that changes the story. Google Cloud revenue surged 82% to $24.8 billion, and its operating income reached $8.8 billion, up from $2.8 billion a year earlier. Cloud is no longer a side project propped up by ads. It’s a second profit engine.
Demand looks broad, too. Pichai said Gemini models are processing 22 billion API tokens (the units AI models read and write) every minute, and he pointed to strong demand for security products.
The whole company is feeling it. Total revenue rose 24% to $119.8 billion, while operating income climbed 30% to $40.8 billion, lifting operating margin by 2 points to 34%. Profits growing faster than sales is exactly what a widening moat looks like.
Who’s Paying for All Those Data Centers?
The bill is real. Alphabet spent $44.9 billion on property and equipment in Q2 2026, and free cash flow (cash left after capital spending) came in at negative $5.9 billion. CNBC reported that shares sank the day after the results as AI spending worries spooked investors.
The funding shift matters even more. During the quarter, Alphabet raised $49.6 billion in net proceeds by selling Class A and C stock plus mandatory convertible preferred stock, set up a program to sell up to $40 billion more in shares, and issued $20.3 billion in senior notes. It bought back no stock in the quarter, versus $13.2 billion a year earlier. It’s the same capacity race shaping the 10 Best Cloud Computing Stocks to Buy According to Billionaires, but shareholders are now directly helping fund the infrastructure expansion.
Still, trailing 12-month free cash flow stood at $53.3 billion, and a Cloud unit earning $8.8 billion in operating income suggests the spending is earning a return. The concern doesn’t break the thesis. It raises the price of being wrong.
The Earnings Line Is Distorted
At 29.04 times forward earnings, as of October 9, Alphabet trades above its 5-year average of 22.93 and far above the sector’s 12.29. Pair that with expected EPS growth of (27.38)% in 2027, and the stock looks expensive for a company whose profits are supposedly about to shrink.
That forecast needs context. Of Q2’s $9.11 in diluted EPS, $6.26 came from an unrealized net gain on equity securities, not from selling ads or cloud services. When this year’s earnings are padded by investment gains, next year’s comparison looks like a decline even if the business keeps growing. That’s why operating income, up 30%, is the better guide to the core business than GAAP net income.
Even so, 29 times earnings is a premium. Investors are paying for Cloud’s momentum and Search’s durability, not for a bargain. That multiple sits well above legacy digital ad and entertainment peers, even as consolidations raise questions like Can Paramount (PSKY) Turn Warner Bros. (WBD) Scale into Returns After Its Regulatory Concessions?
Hedge fund interest ticked up, with 275 funds holding the stock in the most recent quarter, up from 265 in the prior one. Short interest is just 1.49% of the float, a sign of relatively limited bearish positioning.
A Premium Built on Cloud
The evidence points to a moat that’s widening, not cracking: Search is still growing, and Cloud has turned AI spending into real profit. At 29 times forward earnings, though, there’s little room for a stumble. The setup suits long-term growth investors who can stomach heavy spending and some dilution. Alphabet’s next report is due later this month, and a sharp slowdown in Cloud growth while capital spending keeps climbing would change the picture quickly.
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