Key takeaways from Alphabet’s Q2 beat, with stock dipping amid high spending plans

Alphabet stock (NASDAQ:GOOG) (NASDAQ:GOOGL) dipped slightly postmarket in the immediate aftermath of a second-quarter earnings report that again beat expectations easily, with another double-digit gain for revenues — and featured a sharp increase to its spending forecast, as artificial intelligence continues its outsize effect on every part of Alphabet’s business.

Revenues grew 14% year-over-year to hit $96.43B, well ahead of estimates for $94B (an 11% increase) — an acceleration after last quarter’s revenue grew 12%. Q2 revenues grew 13% when counted in constant currency. Cloud revenues, now taking primary focus among Alphabet’s growth areas, rose 32%.

Operating income also grew 14%, to $31.27B, while operating margin held at 32%. A $2.7B boost from “other income” lifted net income to $28.2B, another easy beat.

The company noted, though, that it now sees full-year capital expenditures at $85B vs. a previous forecast for $75B. A Bloomberg consensus for full-year capex expected $73.3B.

CEO Sundar Pichai pointed to the AI impact: “We are leading at the frontier of AI and shipping at an incredible pace. AI is positively impacting every part of the business, driving strong momentum.”

“Search delivered double-digit revenue growth, and our new features, like AI Overviews and AIMode, are performing well. We continue to see strong performance in YouTube as well as subscriptions offerings. And Cloud had strong growth in revenues, backlog and profitability. Its annual revenue run-rate is now more than $50 billion,” Pichai added.

Revenue breakout

Google Search and other, $54.19B (up 11.7%); YouTube ads, $9.8B (up 13.1%); Google Network, $7.35B (down 1.2%); Google subscriptions, platforms and devices, $11.2B (up 20.3%); Google Cloud, $13.6B (up 31.7%); Other Bets, $373M (up 2.2%).

Unit operating results

Of the $31.3B in operating income, $33.1B came from Google Services (up 11.4%). Google Cloud operating income more than doubled again, to $2.83B from a year-ago $1.17B.

The operating loss at Other Bets widened slightly again, to $1.25B from a year-ago loss of $1.13B. And losses grew again at Alphabet-level activities (which includes charges tied to employee severance and office space changes), to $3.37B from $2.29B.

Cash flows

Net cash from operating activities ticked up 4.2% to $27.75B. With heavier investments in property and equipment, free cash flow slipped to $5.3B.

Trailing-12-months cash flow was $66.7B.

Analyst reaction

“On the face of it, it looks like a decent quarter from NASDAQ:GOOGL with a beat on both the top and bottom lines. Operating margins, despite coming in at 32%, have come in flat y/y,” said Seeking Alpha analyst Vinay Utham.

“The pace of capital expenditures shows no sign of slowing down, with capex spend jumping 70% y/y and coming in at $22.45 billion. All in all, good quarter in my opinion, but the lack of operating margin expansion is a concern,” Utham added.

The company’s conference call is set for YouTube at 4:30 p.m. ET.