Alphabet's Q2 earnings report gave the bulls a better story to tell: Search was not penetrated by AI answer engines, while the 82% revenue growth in the Cloud business explained why the company continues to invest heavily in building AI infrastructure.

According to Alphabet's official financial report, the company's total revenue in Q2 2026 was $1197.96 billion, approximately $1.198 trillion, a 24% year-over-year increase; operating profit was $40.77 billion, with an operating margin of 34%. Specifically, Google Search & other revenue was $63.271 billion, YouTube ads revenue was $11.055 billion, Google Cloud revenue was $24.768 billion, and Cloud operating profit was $8.814 billion.

According to a Goldman Sachs research report, Alphabet's 12-month price target is $440. Based on the July 21st closing price of $347.15, this represents approximately 26.7% potential upside. It is worth noting that publicly available information shows that on July 8th, Goldman Sachs had already reduced Alphabet's target price from $450 to $440, which did not specifically occur after the Q2 earnings report.

The key takeaway from this report is not a one-time earnings beat but that two market concerns have temporarily been addressed: whether AI would weaken Google's search ads and whether AI capital expenditures can indeed translate into revenue and profit.

Search Grew 17% YoY; AI Has Not Eroded Google's Ad Core

The biggest controversy for Alphabet still lies in search.

Over the past two years, generative AI and AI search products have continuously challenged traditional search entry points. The market's concern has been that if users shift from Google Search to chatbots or AI answer engines, Alphabet's most profitable ad business would be weakened. Once search ads falter, Alphabet's valuation foundation would also be shaken.

The second-quarter numbers have not supported this gloomy hypothesis. Google Search & other revenue reached $63.271 billion, a 17% year-over-year growth. For a mature business with a quarterly revenue of over $60 billion, this growth rate is still respectable.

This is also a key part of Goldman Sachs' bullish thesis: amid the long-term debate over AI's impact on search, Google can still maintain traffic, ad demand, and commercialization efficiency at the current stage.

YouTub's ad revenue has not lagged behind either. In the second quarter, YouTube ads revenue was $11.055 billion, a 13% year-over-year growth. While this is not the main focus of this article, it reinforces a signal: Alphabet's ad growth is not solely supported by one search engine; video ads are still contributing incremental revenue.

However, search business resilience does not mean that the AI risk has been eliminated. Factors such as Gemini's competitive position, how AI answers change search page ad displays, whether AI features dilute clicks and monetization rates will continue to influence investors' assessment of Google's ad business. The second-quarter search growth is more like evidence of "not deteriorating yet" rather than a complete refutation of AI impact.

Cloud Revenue Surges by 82%, AI Investment Starting to Pay Off

What can change market sentiment more than search is Google Cloud.

In the second quarter, Google Cloud's revenue was $24.768 billion, an 82% year-over-year growth, with an operating profit of $8.814 billion. Not only is the cloud business growing rapidly, but profitability has also significantly improved, directly addressing another market concern: as Alphabet continues to increase AI infrastructure investment, is it merely burning money to catch up with Microsoft, Amazon, and the OpenAI ecosystem, or is it already seeing revenue returns?

Looking at the second quarter, the answer leans towards the positive. AI-related demand is not only driving up capital expenditures but also increasing the scale and profitability of the cloud business.

This is particularly important for Alphabet. Unlike Meta, which primarily absorbs AI investment through its advertising business, Google not only embeds AI in search and ads but also sells computing power, models, platforms, and enterprise AI services in the cloud business. If the cloud business can sustain high growth and maintain a high profit margin, the market's tolerance for AI capital expenditure will increase.

To put it more directly, Alphabet is not just telling investors that "AI is crucial," but is using Google Cloud's growth to demonstrate that the data centers, chips, and modeling capabilities that were invested in the past are now turning into revenue.

But this is not a blank check. The scale of AI infrastructure investment continues to expand, and what investors are really concerned about is how much capital expenditure will grow over the next few years, how long the payback period will be, and whether free cash flow can withstand it.

$440 Price Target, Banking on Search Resilience and Cloud Business Expansion

Goldman Sachs' $440 price target essentially bets that Alphabet's current stock price has not fully reflected the resilience of its search business and the growth of its cloud business. Based on the closing price on July 21, the $440 price target corresponds to nearly 27% upside potential.

Supporting this view is not one-time EPS. In the second quarter, Alphabet's GAAP EPS was $9.11, but the official financial report shows that about $98 billion in net income is included in other income, mainly from unrealized gains on equity investments. Such income cannot simply be seen as an improvement in the core business's profitability.

What is still more worth watching is revenue and operating profit. In the second quarter, Alphabet's GAAP operating profit was $40.77 billion, with an operating margin of 34%. Google Services had an operating profit of $39.543 billion, Google Cloud had an operating profit of $8.814 billion, and Other Bets incurred a loss of $1.799 billion.

According to Goldman Sachs' research report criteria, Alphabet's revenue is expected to increase from $342.91 billion in 2025 to $423.28 billion in 2026, and further to $528.08 billion and $659.74 billion in 2027 and 2028, respectively; EBITDA is expected to increase from $150.18 billion in 2025 to $385.98 billion in 2028.

These forecasts correspond to a somewhat optimistic scenario: search is not rapidly overtaken by AI, YouTube continues to grow, the cloud business scales up with AI demand, while cost efficiency and capital return do not appear to be significantly out of control.

Capital Expenditure Raised to Around $200 Billion, Return Pressure Persists

The pressure that has truly not disappeared is AI capital expenditure.

According to Reuters citing information from the earnings call, Alphabet has raised its 2026 capital expenditure guidance to $195 billion to $205 billion, and stated that capital expenditure in 2027 will continue to "increase significantly," with the specific figure to be provided later.

This has changed the risk narrative when looking at the financials: the issue is not that the company did not provide a 2026 capital expenditure answer, but that the answer itself is larger. The high growth of Google Cloud makes the market more willing to accept AI investment, but with an annual capital expenditure approaching $200 billion, investors will continue to question the payback period.

If cloud business growth and search monetization cannot sustain the investment, Alphabet's stock price will once again face pressure on free cash flow and profit margins. Conversely, if Google Cloud continues to maintain high growth and higher profit margins, AI spending will be more easily seen by the market as a worthwhile investment rather than defensive spending.

Competition risk has not disappeared either. Gemini's position in models and products, AI talent movement, the Microsoft and OpenAI ecosystem, and Amazon AWS's enterprise customer advantage will all impact Google Cloud's future growth. On the search side, there is also the long-term impact of AI answers on ad impressions, click-through rates, and user behavior.

Regulation is also a constraint. Alphabet still faces scrutiny related to its search, ad tech, and platform businesses, and any changes in business models or practices could affect profit margins and valuation.

The $440 price target offers an optimistic view of "search weathering the AI impact, and cloud business realizing AI returns." The second-quarter earnings report has made this version more convincing, but the guidance of nearly $200 billion in capital expenditure has also raised the bar. For the stock price to continue moving closer to the target price, Alphabet still needs to prove that this round of AI investment is not just resulting in higher bills.

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