On Wednesday after hours, Alphabet reported its second-quarter earnings, shifting market focus from quarterly performance to AI investment returns. The delay of Gemini 3.5 Pro, increased capital expenditures, and rapid growth in Google Cloud have put this tech giant to the test on its ability to commercialize AI.
Alphabet (GOOGL.O), the parent company of Google, will release its second-quarter 2026 earnings report after U.S. markets close on Wednesday. The company is facing heightened market scrutiny than in the past, as investors await further evidence of whether its AI investments can generate tangible business returns.
Over the past few months, Alphabet has significantly boosted market confidence due to strong performance in its cloud business. The company’s prior quarterly results, which showed a 63% year-over-year increase in Google Cloud revenue, prompted investors to reassess its AI infrastructure strategy.
However, Alphabet has recently experienced a delay in a key advancement in artificial intelligence. The company originally planned to launch its next-generation flagship model, Gemini 3.5 Pro, in June—a model highly anticipated to help it catch up with competitors in high-margin AI programming tools and agentic AI tasks.
According to foreign media, Google delayed the release of Gemini 3.5 Pro due to concerns about its performance relative to other leading models.
The delay in the model has intensified market concerns about the efficiency of AI investments. As Chinese open-source models like Kimi K3 continue to challenge top U.S. AI labs, investors are reassessing the necessity for tech giants to heavily invest in data centers, purchase chips, and expand computing capacity.
Dave Wagner, portfolio manager at Aptus Capital Advisors, said:
Google missed an opportunity in AI programming, which is indeed an increasingly serious issue... but Google's strategic core lies in its ecosystem.
Alphabet faces pressure not only from product release timelines but also from shifts in the AI competitive landscape. In recent years, AI companies have continuously launched more powerful models, and enterprise customers' demands for model performance, cost, and deployment efficiency keep rising; any critical product delay could give competitors room to catch up.
A Google spokesperson responded: "We are rapidly rolling out multiple models while ensuring they offer high cost-effectiveness for customers. Currently, we are testing the 3.5 Pro, upgraded Flash models, and other models with partners, and are actively engaged in collaborations with the U.S. government."
Increased investment in AI infrastructure draws capital market attention to profit realization.
Alphabet has consistently increased its investment in artificial intelligence infrastructure in recent years. In April, the company raised its 2026 capital expenditure guidance to $180 billion to $190 billion and announced plans to raise approximately $85 billion through equity issuance, including an investment from Berkshire Hathaway (BRKa.N).
Meanwhile, investors are beginning to question whether these massive investments will generate sufficient returns. Major tech companies have previously stated that AI computing demand has exceeded current supply, and data center and chip production capacity remain constrained.
HSBC analysts recently stated that the market will focus on whether enterprise clients are controlling AI spending by adopting lower-cost models, and how Alphabet is responding to the impact of rising hardware prices on its investment plans.
Alphabet's stock price also reflects a shift in market sentiment. After the company reported strong growth in its cloud business at the end of April, its stock initially rose but later retreated. As of now, Alphabet's stock is down approximately 15% from its May high and has declined about 9% since the end of April, underperforming other "Big Seven" tech stocks over the same period.
Over the past three months, Alphabet's stock has risen approximately 4%, while Amazon (AMZN.O) has remained largely flat, Meta Platforms (META.O) has declined nearly 6%, and Microsoft (MSFT.O) has fallen about 5%.
However, for the full year, Alphabet's stock rose approximately 13%, making it the second-best performing company among the "Magnificent Seven."
Analysts believe Alphabet still possesses several competitive advantages, including a vast consumer distribution network, AI model capabilities, cloud infrastructure, and its own developed chip system.
Google Cloud becomes the growth engine as the market awaits earnings validation
Wall Street expects Alphabet's second-quarter performance to continue growing.
According to data compiled by LSEG, Alphabet is expected to report revenue of $11.693 billion for the April to June quarter, a 21.3% year-over-year increase. Visible Alpha data indicates that the market anticipates Alphabet’s second-quarter revenue to be approximately $11.719 billion, representing over a 20% year-over-year growth, with earnings per share projected at $2.90 to $2.95, up from $2.31 in the same period last year.
After deducting traffic acquisition costs (TAC), Alphabet's revenue is expected to be approximately $10.15 billion.
Based on overall market expectations, Google's search business remains its largest revenue source, with projected second-quarter revenue reaching $63.29 billion. Google Cloud Platform (GCP) continues to be the primary growth driver, with market expectations estimating its revenue at approximately $22.4 to $22.5 billion, representing a 64% to 65% increase compared to the $13.6 billion reported in the second quarter of 2025.
Google Cloud's business growth is primarily driven by increased demand for AI services and expanded orders for custom AI chips. The company has previously entered into multi-billion-dollar partnerships with Meta Platforms and Anthropic.
The remaining performance obligations (RPO), which measure the scale of future contract revenue, are expected to exceed $488.1 billion, a 351% year-over-year increase. This metric reflects continued strong commercial demand for Google Cloud.
Additionally, The Information reported that Google is developing a new chip codenamed “Frozen v2,” which may improve model efficiency and reduce processing time by integrating parts of Gemini technology.
Market volatility ahead of earnings reports, with investors focusing on AI commercialization capabilities.
Before Alphabet's earnings report, the options market had already reflected heightened uncertainty.
Based on recent options pricing, traders expect Alphabet's stock to experience a potential bidirectional movement of up to 5.5% before the weekend following its earnings release. Calculated from Tuesday's closing price, the stock could rise to approximately $366, nearing its May high, or fall below $329.
The market's primary focus is not on quarterly revenue performance, but on whether Alphabet can demonstrate that its AI investments are generating sustainable business value.
Wall Street remains generally bullish on Alphabet. Of the 12 analysts tracked by Visible Alpha, 11 have issued buy ratings and one has maintained a neutral rating, with an average target price of approximately $439—representing over 25% upside from Tuesday’s closing price.
However, as AI competition enters the phase of infrastructure investment, Alphabet needs to demonstrate to investors that its substantial investments in data centers, chips, and model development will not only maintain its technological competitiveness but also translate into higher profits and long-term growth.