Google beats estimates but free cash flow turns negative as AI spending surges

Alphabet, Google's parent company, delivered second-quarter earnings that beat market expectations, reaffirming that demand for AI investment remains robust.

The results also exposed the financial strain of aggressive AI spending, as free cash flow turned negative amid massive infrastructure outlays. Markets appear less focused on the earnings beat itself and more attentive to whether Alphabet can balance its expanding AI investment posture with monetization potential and cash generation.

Alphabet reported Wednesday that second-quarter sales rose 24 percent year-on-year to $119.8 billion, topping the $116.9 billion consensus estimate compiled by the London Stock Exchange Group (LSEG).

Among business segments, Google Cloud posted the strongest growth, with sales surging 82 percent from a year earlier to $24.8 billion, driven by rising enterprise demand for AI and infrastructure. The company's core cash-generating units — Search and YouTube advertising — brought in $63.2 billion and $11.1 billion in sales, respectively.

Revenue from the Other Bets segment, which includes the Waymo autonomous-driving taxi service, came to just $382 million, and the segment posted an operating loss of $1.8 billion.

Earnings per share came in at $9.11, more than three times Wall Street's consensus estimate of $2.89. Alphabet attributed the sharp jump in EPS to a rise in other income, explaining it stemmed from "net unrealized gains on equity securities."

The gain reflects an increase in the value of Alphabet's stakes in companies including Elon Musk's space venture SpaceX, which is pursuing a listing, and AI firm Anthropic, whose valuation has risen.

Capital expenditure for the second quarter — a closely watched figure — reached $44.9 billion, roughly in line with the $44.8 billion consensus estimate compiled by StreetAccount.

The sustained pace of capital spending pushed second-quarter free cash flow to negative $5.86 billion. Alphabet had generated more than $24 billion in free cash flow in the third and fourth quarters of last year, but that figure fell to around $10 billion in the first quarter of this year before turning negative in the latest period.

Cash spent on factories, equipment and other capital investments exceeded cash generated from operations. Cumulative free cash flow over the trailing 12 months stood at $53.3 billion.

CEO Sundar Pichai said the company's AI investments are "redefining the horizon of what's possible across every domain," adding that "these outstanding results demonstrate that our differentiated, full-stack AI approach is delivering real, measurable value to customers."

Pichai said about 90 percent of Fortune 100 companies have adopted enterprise Gemini models, and that the Gemini app has reached about 950 million monthly active users. He added that Gemini models are processing about 22 billion API tokens per minute.