Key Morningstar metrics for Alphabet

  • Fair Value Estimate: $433
  • Morningstar Rating: ★★★★
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium

What we thought of Alphabet’s earnings

Alphabet GOOG reported strong second-quarter earnings, with the firm’s sales growing 24% to $120 billion and its operating margins expanding 2 points to 34%. Google Cloud grew by 82% to $25 billion, with margins for the cloud segment also increasing by 15 points to 36%.

Why it matters: Alphabet continues to show real progress in artificial intelligence monetization. As investors seek to understand the returns on massive AI-driven data center spending, we believe returns are showing up for Alphabet across its primary segments.

  • The clearest signal of booming AI spending is found in the Google Cloud segment, with the backlog, or contracted future revenue, increasing to $514 billion, up from $108 billion a year ago.
  • Beyond cloud, we are seeing continued strength in Search, with Google Search growing 17%. Encouragingly, Alphabet’s push to an AI-native search experience is seeing good adoption, with AI Mode’s monthly users exceeding one billion.

The bottom line: We maintain our $433 fair value estimate for wide-moat Alphabet, and continue to view its AI monetization across chips, infrastructure, models, and applications as a great way for investors to gain AI exposure without being limited to a specific part of the AI stack.

  • Alphabet shares are trading down after hours, likely due to investor concern about the firm’s rising capital expenditures, which are expected to exceed $200 billion in 2026.
  • We’d position investor attention on the real returns the firm is generating from its large AI investments, including significant growth in its cloud business and core advertising business. We model continued acceleration as the firm’s hardware sales inflect upward in 2027.

Key stats: Alphabet’s free cash flow turned negative this quarter, a trend we expect to continue in the coming quarters as the firm ramps up its AI investments. As mentioned above, we believe investors should focus on the AI demand story, which supports such large capital expenditures.