Wall Street is showing signs of impatience with the massive investments technology companies are making in artificial intelligence. Alphabet (GOOGL) got a taste of this when it reported its second-quarter earnings in July. The Google parent delivered impressive results, including a sharp 82% increase in Google Cloud revenue, but investors were not entirely satisfied, especially after Alphabet once again raised its capital expenditure guidance, and the stock fell about 6% after the earnings release. Wall Street is now in the “show me the proof” phase of AI spending. Investors are no longer rewarding companies simply for announcing ambitious AI projects; they want concrete evidence that these investments are generating meaningful returns. Alphabet failed to meet that standard in the second quarter, but it will get another chance to prove itself when it reports third-quarter earnings on October 28, with Google Cloud and its growing AI chip business particularly worth watching.
Alphabet is not having trouble growing its business. Second-quarter revenue rose 24% year over year to $119.8 billion, while operating income increased 30% to $40.8 billion. Google Cloud was especially strong, with revenue of $24.8 billion, far above $13.6 billion in the same period last year, and cloud operating income more than tripled to $8.8 billion. However, Alphabet spent $44.9 billion on capital expenditures in the quarter, roughly double its spending in the same period last year, and management also raised its full-year capital expenditure forecast by $15 billion to a range of $195 billion to $205 billion. Even for a company with pockets as deep as Alphabet’s, that is a staggering figure, and the spending is putting pressure on cash flow. Alphabet reported negative free cash flow of $5.9 billion in the second quarter, despite generating substantial cash from operations. That is precisely the issue investors are focused on: the company is growing rapidly, but building the infrastructure to support that growth is becoming increasingly expensive.
One of the strongest arguments supporting Alphabet’s AI investments is the performance of Google Cloud. The business accelerated sharply in 2026, with cloud revenue growing 63% year over year in the first quarter and then jumping 82% in the second quarter. That is especially encouraging because Google Cloud is one of the clearest ways for Alphabet to convert AI computing demand into revenue. But in terms of revenue, Google Cloud still trails far behind Amazon Web Services (AWS), whose second-quarter net sales were $42.23 billion and whose AI and chip businesses each exceeded $25 billion on an annualized run-rate basis. It is exactly this kind of number that helped Amazon’s stock rise after its second-quarter earnings release, even though Amazon also raised its capital expenditure guidance.
There is another part of Alphabet’s AI strategy that deserves more attention: its custom-designed tensor processing units (TPUs). These chips were originally developed to meet Google’s own computing needs, but Alphabet is increasingly turning them into a commercial business, offering customers an alternative to graphics processing units. Google began recognizing revenue from direct TPU chip sales in the second quarter, adding another potential revenue stream beyond renting computing capacity through Google Cloud. Because Alphabet does not disclose TPU revenue separately in its financial statements, management commentary on customer demand, chip sales, and the contribution of custom processors is particularly important. Investors should look for evidence that the business is becoming a meaningful commercial opportunity rather than just another expensive technology project.
In addition, according to people familiar with the matter, Alphabet’s self-driving unit Waymo plans to expand its fleet to five times its current size, reaching 20,000 vehicles by the end of next year, using funding from the $5 billion raised earlier this month. The autonomous ride-hailing service currently has 4,000 vehicles and plans to expand to 8,000 by the end of this year and further to 20,000 by the end of next year. Waymo currently operates in 15 U.S. cities and has announced plans to launch ride services in London, Tokyo, Singapore, and Canada.
Alphabet has many favorable factors: its advertising business continues to generate enormous revenue, Google Cloud is growing rapidly, and custom AI chips may provide another revenue source with strong expansion potential. It does not necessarily need to announce another round of capital expenditure increases or launch new AI initiatives to attract Wall Street’s attention; instead, it needs to prove that Google Cloud can maintain its momentum, that the chip business is attracting customers, and that its massive infrastructure investments are generating attractive returns. Alphabet is a great company that has used AI well, and now it needs to show Wall Street how it is turning those investments into money.
