Alphabet Delivers Strong Q2 Beat as AI and Cloud Growth Justify Higher CapEx

Alphabet (NASDAQ: GOOGL) reported second-quarter 2025 earnings after the close on Wednesday, delivering top- and bottom-line beats that reinforce its momentum in AI, cloud, and core advertising. Revenue came in at $96.4 billion, up 14% year-over-year, topping consensus expectations of $93.3 billion. EPS of $2.31 beat the Street by $0.13 and marked a steady climb from both Q1 and the year-ago period. Initially, shares dipped in after-hours trading following news of a higher capital expenditure forecast—but have since reversed higher as the earnings call gets underway, with investors digesting management’s confident tone on AI-driven investment.

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The quarter showed strength across Alphabet’s business lines. Google Cloud revenue grew 32% year-over-year to $13.6 billion, beating the $12.9 billion consensus. Operating income for the cloud segment more than doubled to $2.83 billion, continuing the margin expansion story from earlier quarters. With demand for AI infrastructure and enterprise services rising, CEO Sundar Pichai emphasized that Cloud’s annualized run-rate now exceeds $50 billion.

Advertising, still the core revenue engine, also beat expectations. Ad revenue rose to $71.3 billion versus a $69.6 billion consensus, led by Search, which jumped to $54.1 billion, a gain of 11.7% YoY. YouTube ads brought in $9.8 billion, up 13.1% and ahead of the $9.2 billion estimate. Meanwhile, Google’s subscriptions, hardware, and platforms unit posted a 20.3% gain, generating $11.2 billion as products like YouTube Premium and Google One continue to scale.

Operating income reached $31.3 billion with margins holding steady at 32%. While margins didn’t expand versus last year, the consistency was viewed as a strength given the scale of reinvestment taking place. Net income, boosted by $2.7 billion in other income, came in at $28.2 billion.

The biggest headline came from Alphabet’s updated capital expenditure guidance. Management now expects full-year CapEx to reach $85 billion, a $10 billion increase over its prior target and well above Bloomberg’s consensus of $73.3 billion. Rather than being framed as a red flag, many see the increased investment as a reflection of Alphabet’s strategic position in the AI infrastructure race. CFO Ruth Porat reiterated that spending will support continued buildout of data centers, custom silicon, and generative AI capabilities across the stack.

No major updates were provided on the DOJ antitrust case, though investors remain attentive to potential structural remedies tied to Search and ad tech. CFRA’s Angelo Zino continues to assign a low probability—just 10%—to a potential breakup. Alphabet made no material changes to its regulatory disclosures.

Valuation remains a key part of the bull case. At under 16x forward earnings ex-cash, Alphabet is still the cheapest of the “Magnificent Seven.” With double-digit revenue growth, expanding cloud margins, and a fortress balance sheet, some argue the multiple is unjustifiably low. If AI monetization accelerates and regulatory risk remains containable, Alphabet could command a re-rating in the second half.

Initial market reaction was cautious, as traders weighed the $85B CapEx figure against strong operating performance. However, as the call progressed and management emphasized the strategic rationale behind its investments, shares of GOOGL reversed higher. Analysts were generally constructive. The CapEx increase looks like a bullish signal of confidence rather than a cost overrun

The bigger picture is one of durable momentum. Alphabet continues to post healthy growth in its legacy businesses while aggressively scaling into high-value verticals like AI and cloud infrastructure. With Search and YouTube still delivering, and Cloud solidifying its place as a third hyperscaler alongside AWS and Azure, Alphabet is well-positioned to capitalize on the next wave of digital demand.

If execution continues and capital deployment yields returns, this quarter may be remembered not for a spike in spending—but for the clarity with which Alphabet signaled its long-term AI ambitions.