Alphabet shares fell Wednesday night after Google’s parent company reported strong but positive second-quarter results. While the introduction of artificial intelligence is driving sales growth, it is also increasing the level of capital investment. And that doesn’t seem to be changing any time soon. According to LSEG data, second-quarter sales rose 24% year over year to $119.8 billion, significantly exceeding expectations of $116.9 billion. Earnings per share were $9.11. This is significantly higher than the consensus estimate of $2.89 compiled by LSEG. But the results included a huge ($99 billion) contribution from equity gains from SpaceX and Anthropic stocks. Excluding this gain, Alphabet’s operating profit would be closer to $2.85 per share. That’s why Street probably thinks this is a fundamental mistake. However, operating profit exceeded expectations at $40.77 billion, and operating profit margin expanded by 1.6 percentage points year-on-year. Alphabet’s stock price fell more than 3% in after-hours trading. The stock closed at an all-time high of $402.62 on May 13, continuing a downward trend that began in mid-May. The stock had risen to that high after strong first-quarter results in late April provided evidence that the company’s AI investments were paying off. But the prepayment after spring earnings has now disappeared. In the preceding months, the market had grown increasingly skeptical of the surge in AI spending by hyperscalers. And Alphabet’s recent bond and stock issuances have contributed to that change in attitude. Additionally, the departure of a handful of AI researchers to rival companies in June and a delay in the launch of a new flagship model added to the questions surrounding Alphabet going into the second quarter. GOOGL YTD Mountain Alphabet’s year-to-date stock performance. In conclusion, Alphabet had a good quarter on the AI demand side. However, the full report includes enough shortfalls that the drop in the stock price in after-hours trading is not surprising. The market is not in a forgiving mood. First of all, Alphabet’s underlying operating profit fell short. Perhaps even more frustrating for investors already concerned about huge spending on data centers, the team has revised upward its outlook for capital spending this year. The company now expects to spend $195 billion to $205 billion in capital spending in 2026, up from the $180 billion to $190 billion range it provided in April (which itself is an increase from its early February guidance). The increase is meant to accelerate the company’s ability to deliver the capacity needed to meet demand for its AI products, but it’s still hard to hear at a time when free cash flow turned negative for the quarter. Additionally, Alphabet executives reaffirmed that capital spending will “increase significantly in 2027.” There was another blemish in the numbers. Google Search revenue was lower than expected. Granted, this still represents solid year-over-year growth of nearly 17%, but a failure is a failure. Now consider that this is a failure in the most important areas, and it will be difficult to get Wall Street more broadly excited about the outcome. This is especially true given the ongoing debate about what the introduction of AI into Google search results means for monetization rates. In any case, quarterly numbers alone won’t solve the problem. But on a more positive note, CEO Sundar Pichai says these new AI enhancements are increasing usage of Google Search. The two main ones are AI Overview, which is a generated response that appears at the top of traditional search results, and AI Mode, which is a feature that users can toggle through the search bar. “Since we expanded AI Mode globally last October, we have surpassed 1 billion monthly active users,” Pichai said. “And, similar to the AI overview, AI Mode is gradually increasing overall search queries, with billions of clicks being sent to websites every week through search’s AI capabilities.” He later added, “This quarter, we reduced the cost of supporting AI Mode to its lowest level since launch, even as we continue to evolve our more advanced AI capabilities.” Finally, there is still surplus from the $85 billion in fundraising efforts announced in June. As part of its equity raise, Alphabet said it will launch a $40 billion at-the-market (ATM) offering program in the third quarter, which it says will be used “primarily to satisfy tax obligations associated with employee stock grants.” In a conference call Wednesday, Chief Financial Officer Anat Ashkenazi said Alphabet has “no plans to return to the stock market” except for ATM sales. While this may be seen as positive, the fact that ATM only launched this month means there is still a large supply of stocks waiting to hit the market. It puts something like a cap on top. Despite these imperfections, Alphabet’s second-quarter results show traction in terms of adoption of AI products. And it is necessary to accumulate this evidence over time to justify all expenditures. The most direct demonstration of this traction is Google Cloud’s performance, which delivered significant improvements in both revenue and operating profit. Other positive signs include strong engagement trends within Gemini apps and through the use of application programming interfaces (APIs) on the enterprise customer side. API tools are a way for enterprise organizations to connect their software stack to the Gemini model and leverage its capabilities. YouTube advertising was another bright spot, with engagement on the platform increasing thanks to the World Cup. Alphabet has been on a roll since the spring of 2025. The company is equipping its esteemed Gemini family of models and key custom AI chips known as tensor processing units (TPUs) to power Google Cloud businesses. Along with the still dominant Google Search, YouTube, and Waymo, Alphabet is a valuable technology play in any portfolio. Competitors: Amazon, Microsoft, and Meta Platform Weight in our portfolio: 3.03% Latest purchase: April 6, 2026 Start date: December 29, 2025 We also liked what we heard from Pichai about Alphabet’s AI model strategy in the backdrop of flagship model delays and last week’s arrival of highly rated open-class Chinese model Kimi K3. Also on Tuesday, Alphabet released three more specialized models, including one aimed at cybersecurity tasks. Pichai asserted that Alphabet wants to play at all levels, with every intention of driving innovation at the frontier level, while also acknowledging the broad appeal of the “flash” hierarchy model. “We see a lot of demand for our flagship Gemini Flash series because it offers a sweet spot between performance and cost,” Pichai said in prepared remarks. Asked about playing in a crowded lower-end market, Pichai was quick to point out that Alphabet wants to be able to offer the best models at different price points. We think this is the right strategy. Alphabet’s main advantage in AI is its vertically integrated approach, from models to silicon with custom tensor processing units (TPUs). Fellow club name Broadcom co-designs the TPU with Alphabet. Therefore, it would be wrong to give up on leading frontier model innovation. At the same time, however, the company’s broad reach and wide range of consumer products means it has significant opportunities to monetize less advanced models, and much of its R&D spending is likely already being spent on developing more advanced Frontier models. Taking both the call results and comments together, we tend to view this weakness as a long-term buying opportunity, and therefore reiterate our 1 rating and $400 price target. But given multiple blemishes, including Alphabet’s botched sale of ATM shares, there’s no reason to rush Thursday. Instead, we recommend waiting for the stock price to settle down before entering. The Gemini model API currently processes approximately 22 billion tokens per minute, up from more than 16 billion in the previous quarter. Tokens are the basic unit of data for AI computing. The World Cup was a tailwind for YouTube engagement, with over 1.7 billion unique viewers watching World Cup-related content on the platform. Google Cloud’s growth accelerated to 82% year over year. This is up from 63% annual growth in Q1 and accelerated from 48% annual growth in Q4 2025. Even better, Google Cloud’s backlog now stands at $514 billion, up from $460 billion last quarter. Today, nearly 90% of Fortune 100 companies use Gemini Enterprise, and 90% are also Google Cloud Security users. (Jim Cramer’s Charitable Trust is long GOOGL. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investing Club, you’ll receive trade alerts from Jim Cramer before he makes a trade. 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