On the Eve of Alphabet's Earnings, Deutsche Bank Backs the Stock: Look Beyond Capex, the Real Surprise May Come from Google Cloud

After the market close on July 22, Alphabet, the parent company of Google, will release its financial results for the second quarter of 2026. The current market trading logic is highly focused on a core proposition: In the AI era, are the continuously expanding capital expenditures (Capex) a heavy burden eroding profits, or a forward-looking realization of future growth?

In a report released on July 20, Deutsche Bank pointed out that although the market remains concerned about the slowing growth of the search business, the delayed launch of the new Gemini model, and the continued increase in AI investment, the variable truly worth watching is not capital expenditure itself, but the possibility that Google Cloud revenue growth may significantly exceed current expectations. If cloud business demand releases as expected, the incremental profits brought by this in the coming years will be sufficient to cover the higher intensity of AI investment, and the company's overall profitability still has room for further upward revision.

For investors, the key highlight of this earnings report is not whether Capex continues to rise, but how management characterizes the trend in cloud service demand, changes in order backlog, and the pace of future revenue realization. These signals may determine whether the market will re-price Alphabet's valuation logic under the AI investment cycle.

Google Cloud Is the True Variable Determining Valuation

Deutsche Bank's most optimistic judgment centers on Google Cloud.

Analysts raised their forecast for Google Cloud's second-quarter revenue growth from 65% to 70%, and expect it to accelerate further to 75% in the second half of 2026.

This forecast is based on three judgments. First, demand for AI computing power remains in short supply; Google even recently rented part of its computing resources from SpaceX. Second, as of the end of the first quarter of 2026, the scale of Google Cloud's backlog orders had reached $462 billion, a year-on-year increase of 400%. In addition, some hyperscale cloud providers, including Amazon, have begun to raise prices for certain cloud services.

More importantly, Deutsche Bank believes that the market has significantly underestimated the future revenue scale of Google Cloud. It expects Google Cloud revenue to reach $190 billion to $195 billion in 2027, while the market consensus expectation is only about $142 billion. Based on a 30% profit margin, this additional revenue alone could contribute approximately $15 billion in GAAP operating profit, equivalent to an increase of about $1 in earnings per share.

Capex Will Continue to Rise, but Financing Capacity Is Also Strengthening

Regarding AI infrastructure construction, Deutsche Bank also significantly raised its forecast for Alphabet's future capital expenditures. The company previously estimated 2026 capital expenditures at $180 billion to $190 billion and stated that 2027 would see a "significant increase" compared to this year.

Combining the order backlog situation, Deutsche Bank estimates that to meet existing demand, Google needs about 11.5GW of computing capacity; in the baseline scenario for 2027, an additional 10GW will be needed. Calculating based on a construction cost of about $30 billion to $35 billion per GW, Deutsche Bank expects capital expenditures in 2027 to be about $325 billion, higher than the previous forecast of $250 billion; in 2028, it will further rise to $365 billion to $370 billion.

However, analysts also pointed out that since Google adopts a hybrid deployment of TPUs and Nvidia GPUs, its unit construction cost is expected to be lower than market concerns.

At the same time, the company's financing capacity remains ample. This quarter, Alphabet has completed approximately $65 billion to $70 billion in financing, including a $10 billion investment from Berkshire Hathaway, two equity financings of about $36 billion each, an ATM issuance facility of up to $40 billion, and multi-currency senior bond issuances.

As of the end of the first quarter of 2026, the company held about $127 billion in cash and investments, and about $107 billion in unlisted securities; Deutsche Bank expects that by the end of 2027, the company's cumulative operating cash flow will be about $420 billion.

Deutsche Bank believes that Alphabet is currently not facing a problem of "excessive Capex," but rather that the market is too focused on inputs and has underestimated the speed of Google Cloud revenue realization.

Search Growth Has Not Stalled, Ad Budgets Begin to Flow to AI

Regarding Google's search business, the market's biggest concern is that AI Overview may change traditional search traffic.

However, Deutsche Bank's channel research found that advertiser behavior is showing new changes. Although some advertisers maintain their original search budgets, more and more brands are beginning to try allocating ad budgets to AI Overview, while increasing AI ad placements related to Google Search and ChatGPT.

At the same time, SimilarWeb data shows that Google's website visits and page views in the second quarter of 2026 improved compared to the first quarter. Based on these data, Deutsche Bank maintains its forecast that Google Search will grow 16.5% year-on-year in constant currency in the second quarter, and expects 14% year-on-year growth in the third quarter.

Analysts believe that even if the release of the new Gemini model is slightly delayed, current AI models can continue to improve advertising delivery efficiency, and the fundamentals of the advertising business have not undergone substantial changes.

Gemini Delay Is Not Key, Users Continue to Grow

The delay in the Gemini release has become another focus of market attention. Google had previously stated at the I/O 2026 conference that Gemini 3.5 Pro would be launched subsequently, but as of now, the new model has not been officially released.

However, Deutsche Bank believes that the model release timeline has not changed the user growth trend. SimilarWeb data shows that Gemini's web traffic and page views continued to grow in the second quarter, although the growth rate slowed down. Sensor Tower data shows that Gemini App downloads have fallen back from their 2025 highs, but the total number of sessions continues to grow.

In horizontal comparison, ChatGPT remains leading, but session volume has basically stabilized over the past 12 months; Meta AI has shown significant growth since the launch of Muse Spark; Grok has seen declines in both downloads and session volume so far this year.

Therefore, Deutsche Bank believes that the adjustment in the Gemini release schedule is a short-term event and will not change Alphabet's long-term AI competitiveness.

Risk Warning and Disclaimer

The market involves risks, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Responsibility for investments made based on this lies solely with the investor.