Alphabet 2Q'26: Google Cloud is On Cloud Nine

For the first time as a public company, Alphabet reported negative Free Cash Flow (FCF) in 2Q’26. That sounds scary (only if you have very rudimentary understanding of investing); you need to juxtapose it with the fact that the same company has now accelerated its revenue for six consecutive quarters. Revenue grew 24% (23% FX-adjusted) to $119.8 Billion in 2Q’26, and Google Cloud grew ~82%. Yep, no typos here: a business knocking on a ~$100 Billion annualized run-rate grew ~82%!

Here’s a more granular segment wise growth trajectory since 1Q’23.

And these revenues weren’t really empty calories either. Operating income grew ~25% to $40.8 Billion for a 34% consolidated margin. Note that net income and EPS grew much faster than that, but it was primarily unrealized gains in the equity portfolio (SpaceX and Anthropic).

As mentioned earlier, the showstopper was Google Cloud: operating income more than tripled YoY to $8.8 Billion, with margin expanding from 20.7% to 35.6% while still absorbing the Wiz integration drag i.e. margins would be even higher if we adjust for the Wiz integration.

However, let me repeat the caveat I mentioned last quarter:

In both these segments, I should highlight that there is a slight wrinkle in comparing current segment margins to historical segment margins. In 2Q’24, Alphabet disclosed that “AI model development teams previously under Google Research in our Google Services segment are included as part of Google DeepMind, reported within Alphabet-level activities, prospectively beginning in the second quarter of 2024”.

As you can see below, there has been a noticeable step up in “Corporate costs” which includes the “Alphabet-level activities”.

Given that context, it is better to focus on consolidated operating margins than any segment level margins.

So revenues are accelerating and profits are growing at healthy margins. What are investors worried about then? I don’t want to engage in the day-to-day price action in current market environment, but there are indeed some legitimate concerns despite such operating performance which I will discuss more behind the paywall.

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Let me quickly go through the key segments of Alphabet.