MSX US Stock Daily Watch | Google 2026 Q2 Earnings: The "Most Profitable Quarter Ever" Propped Up by $99 Billion in Unrealized Book Gains
- Core Viewpoint: In Alphabet's Q2 2026 earnings report, the EPS was artificially inflated due to one-time equity revaluations. The true highlight lies in the cloud business's explosive 82% growth and the improvement in operating margin to 34%. However, the surge in capital expenditure led to negative free cash flow, making the pace of AI infrastructure investment and the sustainability of cloud business growth key points to watch going forward.
- Key Elements:
- Revenue was $119.796 billion, up 24% year-over-year, surpassing the expected $117.022 billion; diluted EPS reached $9.11, a nominal increase of 214%, but this included $99 billion in book gains from the revaluation of stakes in Anthropic and SpaceX.
- Excluding one-time gains, the actual operating EPS was approximately $2.85, largely in line with market expectations of $2.90. The headline EPS figure is misleading.
- Google Cloud revenue was $24.768 billion, surging 82% year-over-year and significantly exceeding the expected $22.418 billion. This was the biggest surprise of the report and reflects the strength of the core business.
- Total advertising revenue was $81.629 billion, with search ads up 17% year-over-year and YouTube ads up 13% year-over-year, slightly exceeding the expected $81.124 billion, demonstrating the stability of the core business.
- Operating profit was $40.77 billion, up 30% year-over-year. The operating margin improved from 32% to 34%, indicating enhanced profitability.
- Capital expenditure reached $44.92 billion, a significant sequential increase (from $35.67 billion in Q1), causing free cash flow to turn negative at -$5.855 billion, reflecting an acceleration in AI infrastructure investments.
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Today's Observation
Alphabet's Q2 2026 revenue reached $119.796 billion, up 24% year-over-year, beating expectations of $117.022 billion. Google Cloud revenue hit $24.768 billion, surging 82% year-over-year, marking the biggest highlight of the quarter. Diluted EPS came in at $9.11, which on the surface appears to have surged 214% from the expected $2.90. However, there is a key catch: the $99 billion in "other income" this quarter came almost entirely from the book value revaluation of the company's holdings in Anthropic and SpaceX. Excluding this one-time gain, the actual operating EPS was approximately $2.85, roughly in line with expectations. Therefore, the real surprises lie in the cloud business and operating margin, not the EPS figure itself.
Data in a Minute
• Revenue: $119.796 billion, +24% YoY, beating the $117.022 billion estimate
• Google Cloud revenue: $24.768 billion, surging 82% YoY, beating the $22.418 billion estimate
• Total advertising revenue: $81.629 billion: Search grew 17% YoY, YouTube ads grew 13% YoY, slightly beating the $81.124 billion estimate
• Diluted EPS: $9.11. Excluding the $99 billion one-time equity revaluation, operating EPS was ~$2.85 (estimate $2.90)
• Operating profit: $40.77 billion, up 30% YoY, with an operating margin of 34% (32% last year)
• Capital expenditure: $44.92 billion, a significant sequential increase (Q1 was $35.67 billion), leading to negative free cash flow (-$5.855 billion)
MSX View
The real story of this earnings report isn't in the EPS line. The $99 billion revaluation of Anthropic and SpaceX stakes boosted net profit by 298%, but this is an unrealized book gain – meaning it's not cash generated from advertising or cloud operations. The metrics that best reflect the health of the core business and are sustainable and comparable are the cloud business's 82% growth rate and the 34% operating margin. With single-quarter CapEx of $44.9 billion and free cash flow turning negative, Google is clearly accelerating its bets on AI infrastructure. The trajectory of this investment curve and whether the cloud business can maintain its 82% growth rate are the key signals to watch next.
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