Google Smashes EPS, Stock Falls
Last week, Zacks Rank #2 (Buy) company Alphabet (GOOGL) reported financial results that smashed Wall Street expectations. Total revenue jumped to ~$120 billion, representing a 24% year-over-year increase. Meanwhile, earnings per share of $9.11 smashed Zacks Consensus Analyst Estimates by a whopping 216.32%! In fact, Google has delivered positive earnings surprises for 13 consecutive quarters and has beaten Zacks Consensus Analyst Estimates by a juicy 86.65% over the past four quarters.
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Despite the massive earnings beat, GOOGL shares slid 7%.
Why Did GOOGL Shares Plunge After Earnings?
The primary reason that Google shares fell despite robust earnings was its massive AI capital expenditures and its forward guidance for even higher CAPEX spending. In Q2, Google spent ~$45 billion, doubling its Q2 spend from 2025. Meanwhile, Google upped its annual CAPEX guidance for 2026 to $195-$200 billion.
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Google’s immense AI spending means that the company has flipped to free cash flow negative for the first time in its history as a public company.
Image Source: Zacks Investment Research
Google Management Deserves the Benefit of the Doubt
In 2019, Google co-founder Larry Page stepped down from his role as CEO. However, although Page has amassed more money than he could ever spend in a lifetime, he recently returned to Google to spearhead the company’s artificial intelligence efforts. Page recently commented on the importance of the AI race, saying:
“I’m willing to go bankrupt rather than to lose this race.”
While Page’s language sounds reckless and fast and loose; investors should fade him at their peril. On a recent “All In Podcast” appearance, Chamath Palihapitiya perfectly broke down why selling Google due to CAPEX makes little sense:
“Do you know what Google’s 25-year average ROIC has been since going public? 32%. When you are a machine that compounds money at 32% over a 20-year average, you give these guys the benefit of the doubt. These are not guys flying fast and loose, they are methodically investing in their edge.”
Google Cloud Benefits from More AI Models
Google’s Gemini AI model has proven that the company may be an underdog to win the AI race. In the earnings call, management explained how Gemini Enterprise has been adopted by nearly 90% of Fortune 100 companies. The Gemini app has nearly reached the 1 billion monthly active user milestone. Better yet, Google management has perfectly threaded the needle with its massive legacy search business. In fact, search has grown since Gemini debuted, and search queries are at all-time highs.
