Alphabet Q2 Earnings Review: Cloud Growth Fuels Strong Beat
$Alphabet(GOOG)$
Key Financial Highlights
~Revenue rose 14% year over year to $96.43 billion, exceeding the market estimate of $93.94 billion. Growth was fueled by resilient ad demand, rapid cloud expansion, and favorable currency impact.
~EPS reached $2.31, up 22% Y/Y, driven by operating leverage from declining cost ratios.
~Google Ads revenue climbed 10% to $71.34 billion, beating the $69.70 billion estimate.
~Google Cloud revenue soared 32% to $13.62 billion, surpassing expectations and accelerating from Q1's 28% growth.
~2025 capital expenditures were revised upward from $75 billion to $85 billion.
Advertising Shows Resilience Amid AI Shifts
Google's total advertising revenue grew 10% Y/Y to $71.34 billion, with search ads rising 12% to $54.19 billion. The business remains robust—largely driven by commercial queries, an area where AI search has yet to significantly disrupt.
According to Sensor Tower, ChatGPT app downloads are roughly 5x those of Gemini, yet the two maintain stable global traffic share, suggesting traditional search dominance remains intact.
AI is enhancing ad performance and boosting advertiser confidence. Since March, Google has rolled out AI Overviews, followed by AI Mode in May (U.S.). Although total ad click volume saw modest shifts, conversion rates stayed steady. Google's PMAX product continues to improve advertiser return on ad spend (ROAS) via AI optimization.
Per Tinuiti, short keyword search volume has declined slightly in 2025, while long-tail (3–4 word) searches have driven impression gains and doubled conversion rates—indicating higher purchase intent. Ad channel feedback also notes improving CTR for some advertisers in June.
YouTube Engagement Strengthens
YouTube ad revenue reached $9.796 billion in Q2, up 13% Y/Y. While brand ad spend remains soft, YouTube's pivot toward performance-based formats—especially connected TV (CTV)—has boosted market share.
According to Gupta Media, YouTube CPM surged 46% Y/Y in Q2, reversing the 20% decline seen in Q1. User engagement is also trending up, with time spent on the YouTube app rising 9% Y/Y—just shy of Q1's 11% growth.
Google Cloud Powers Ahead
Google Cloud posted 32% revenue growth, with accelerating momentum versus Q1. Demand remains strong—OpenAI recently selected Google Cloud to support ChatGPT, joining clients like Salesforce, which uses Gemini to build AI agents deployed on Google Cloud.
The cloud unit continues to deliver profitability. Operating income reached $283 million, with margins jumping to 20.7%, up sharply from 11.3% a year ago.
Capex Expansion Raises Questions
Alphabet plans to boost 2025 capital expenditures to $85 billion, up from $75 billion—and far above 2024’s $52.4 billion—as it ramps investment in AI infrastructure.
This expansion has triggered investor concerns:
~Operating income rose 14% Y/Y to $31.27 billion, in line with revenue growth. Operating margin held steady at 32.4%.
~Free cash flow dropped 61% Y/Y to $5.3 billion.
Amid concerns over large-scale capital expenditures, Google's stock initially dipped in after-hours trading before rebounding.
Summary
Alphabet once again delivered strong results, especially from its fast-growing cloud business. Despite concerns over AI's impact on search, Google's valuation remains the lowest among the "Magnificent Seven" tech giants—making it attractive for long-term investors.
Goldman Sachs analyst Eric Sheridan continues to view Alphabet as one of the most compelling risk/reward opportunities. While generative AI adoption and regulatory uncertainty (DOJ's antitrust case) remain key watchpoints, he believes Google's strength lies in embedding Gemini-powered AI across core platforms—including Gmail, Search, Chrome, Drive, Maps, YouTube, and Photos—an advantage the market may be underestimating.
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