Alphabet's second quarter showed revenue accelerating to 24 percent year over year and operating margins widening to 34 percent, but capital expenditures doubled to $44.9 billion and pushed free cash flow to a negative $5.9 billion. The stock has fallen 18 percent from its mid-May peak of $408.61, marking four consecutive monthly declines, the longest such streak since 2015, even as the business posts its strongest growth in years.
The numbers that matter
Revenue reached $119.8 billion, up from 14 percent growth in the year-ago quarter and 22 percent in the first quarter. Operating income climbed 30 percent. Google Search and other rose 17 percent, YouTube ads 13 percent, and Google Cloud surged 82 percent to $24.8 billion with operating income roughly tripling to $8.8 billion. That cloud segment now converts 36 percent of revenue into operating profit, up from 21 percent a year earlier. Demand is not the problem.
The cash flow reversal
Free cash flow was $24.5 billion in the third quarter of 2025 and $24.6 billion in the fourth. It dropped to $10.1 billion in the first quarter of 2026 and turned negative in the second. Operating cash flow rose 41 percent to $39.1 billion, yet no longer covers a single quarter's capital spending. The company spent about $28 billion on buybacks in the first half of 2025; the first-half 2026 figure was not disclosed in the filing.
Guidance keeps climbing
Management raised full-year capital expenditure guidance to $195 billion to $205 billion from a previous $180 billion to $190 billion and signaled further significant increases in 2027. "We expect the free cash flow will remain under pressure driven by our investments in technical infrastructure," chief financial officer Anat Ashkenazi said on the earnings call. The forward price-to-earnings ratio has compressed to about 22. The market is pricing the spending, not the growth.
What to watch next
The cloud margin trajectory suggests the AI build-out is generating returns faster than the prior cycle. Whether that pace justifies a $200 billion annual run rate, and how long free cash flow stays negative, will determine if the current multiple represents value or a trap.