Cloud business surges by 32%! Alphabet Inc. Class C (GOOGL.US) throws 85 billion to expand AI infrastructure and predicts that spending will continue to increase by 2026.
Google announced that it will raise its annual capital expenditures plan to about $85 billion and announced that it will continue to increase investments next year. The company stated that this decision stems from strong demand for its cloud computing services.
In the financial report released on Wednesday in US Eastern time, Alphabet Inc. Class C (GOOGL.US) announced that it plans to increase its annual capital expenditure to about $85 billion and forecasted that it will continue to increase investment next year. The company stated that this decision was driven by the strong demand for its cloud computing services. This search giant, with new artificial intelligence (AI) features and a stable digital advertising market, reported quarterly revenue and profits far exceeding Wall Street expectations.
For the second quarter ending on June 30, Alphabet Inc. Class C total revenue reached $96.43 billion, exceeding analysts' average expectation of about $94 billion; earnings per share were $2.31, also higher than the expected value of $2.18.
Among them, Alphabet Inc. Class C's cloud business sales surged nearly 32% year-on-year, far exceeding the expected growth of 26.5%, becoming the main driver of revenue growth. "Facing the continued strong demand for cloud products and services, we are increasing our capital expenditure investment," emphasized CEO Sundar Pichai in the financial report statement.
Although the stock price briefly declined after the financial report was released, it quickly rebounded after details of the strong demand for cloud business were disclosed in the executive conference call. The company's stock price has risen more than 18% since the last quarterly report released in April.
However, the significant increase in capital expenditure still came as a surprise to the market. Dave Wagner, portfolio manager at Aptus Capital Advisors, said, "I don't think anyone expected the capital expenditure guidance for 2025 to be adjusted. Alphabet Inc. Class C's performance this quarter was impressive, easily surpassing expectations, but the $10 billion increase in capital expenditure dampened the joy."
Forrester analyst Nikhil Lai believes, "Facing the competition pressure from OpenAI, Alphabet Inc. Class C had to significantly increase its investment in AI infrastructure and applications."
Chief Financial Officer Anat Ashkenazi revealed in the conference call that given the market demand and growth opportunities, capital expenditure will further increase in 2026. She added that although the speed of server deployment has increased, demand for cloud services still exceeds supply.
Previously, Alphabet Inc. Class C promised capital expenditure of about $75 billion for this year, a figure already higher than the Wall Street expectation of $58.84 billion at that time. However, this is only a part of the over $320 billion that the tech giant plans to invest in building AI capabilities.
Cloud Business Growth
The rise of AI technology has driven the surge in demand for cloud computing services. Although Alphabet Inc. Class C's cloud business still lags behind Amazon.com, Inc.'s AWS and Microsoft Corporation's Azure in total sales, its efforts to catch up through AI solutions, including in-house TPU chips (competing with NVIDIA Corporation's GPUs) have been notable. Pichai revealed that the business saw a 28% increase in customer numbers quarter-on-quarter.
He said, "The comprehensiveness of our AI product portfolio, the breadth of service offerings, and providing customers with models based on GPUs and TPUs have all contributed to the growth in demand."
In June this year, it was reported that the developer of ChatGPT, OpenAI, had listed Alphabet Inc. Class C's cloud as one of its cloud computing providers, which was a significant victory for Alphabet Inc. Class C an unexpected collaboration with a direct competitor in the AI field, and also an indication of OpenAI's attempt to reduce its reliance on major supporter, Microsoft Corporation. However, Investing.com senior analyst Jesse Cohen pointed out that the surge in capital expenditure has raised concerns in the market about the earnings pace and short-term profit impact of Alphabet Inc. Class C.
Facing fierce competition from Chinese rivals and dissatisfaction from investors over delayed returns, Alphabet Inc. Class C, like other tech giants, continues to invest heavily in AI, stating that this is a necessary step to drive product upgrades.
AI Competition
In the search business sector, new features such as AI Overviews and AI Patterns are helping Alphabet Inc. Class C increase user engagement and compete with popular chatbots like ChatGPT.
Pichai revealed that after the full-scale deployment of AI Patterns was announced at the annual developer conference just two months ago, the monthly active users had exceeded 100 million; while Alphabet Inc. Class C's in-house competitor, ChatGPT, Gemini, had over 450 million monthly users. As the flagship AI product of Alphabet Inc. Class C, the Gemini model is rapidly being integrated into all products and pushed to enterprise customers. Despite receiving praise from AI experts for the new version released earlier this year, most evaluations suggest that its user adoption still lags behind OpenAI's ChatGPT.
Data showed that advertising, which accounts for three-quarters of the company's total revenue, saw a second-quarter revenue growth of 10.4% to $71.34 billion, exceeding the expected $69.47 billion.
Dan Morgan, senior portfolio manager at Synovus Trust, said, "This is likely to alleviate concerns in the investment community they have been worried that products like OpenAI/ChatGPT may erode Alphabet Inc. Class C's search query growth."
In the AI talent war, Alphabet Inc. Class C also faces fierce competition. Meta has offered sky-high salaries to attract researchers from the Super Intelligence Lab, driving up talent costs across Silicon Valley. Earlier this month, Alphabet Inc. Class C announced the acquisition of AI programming startup Windsurf's core team and technology licenses for approximately $2.4 billion. Ashkenazi stated that Alphabet Inc. Class C will "ensure reasonable investment to gather the industry's top talents."
Additionally, Alphabet Inc. Class C's core businesses face the risk of being split a federal court ruled that the company's dominance in search and some areas of advertising technology constitutes illegal monopolies. Although Alphabet Inc. Class C has stated it will appeal, lead judge Amit Mehta is expected to announce concrete measures to restore competition in the search engine next month.
In other business areas, the video platform YouTube's advertising revenue for this quarter was $9.8 billion, surpassing the expected $9.56 billion. With its dominant position in the living room streaming sector and heavy investment in podcasting business, this ad-based platform continues to perform well.
The innovative businesses under "Other Bets," including the autonomous driving project Waymo, generated revenue of $373 million this quarter, lower than the expected $429.1 million. Waymo expanded its service area in Austin by more than double this month and announced the start of data collection in New York City to obtain testing permits, but its commercialization process seems to be falling short of investor expectations. Meanwhile, other innovative business divisions are facing pressure to operate independently.
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