Google Stock Clears Major Hurdle, Yet One Serious Concern Remains

In this post, we take a deeper look at Google's earnings results for Q2 and share our thoughts on:

• Earnings results for Google Search and updates on the battle between Gemini and ChatGPT
• Google Cloud’s results, and what the increase to capex means in competitive context
• Threats to Google’s ecosystem—the one serious concern that remains for Google Stock
• Who benefits from Google’s $85 billion capex and the AI growth stock we like better than Alphabet

On May 7th of this year, during the Department of Justice’s antitrust trial against Google, Apple's Senior Vice President of Services, Eddy Cue, revealed in his testimony that Safari searches declined for the first time in 22 years. Mr. Cue attributed the decline to the rising popularity of AI-powered search and assistants such as OpenAI’s ChatGTP, Perplexity AI, xAI’s Grok, and Anthropic’s Claude. On the topic of the eventual transition from traditional search to AI-powered alternatives, Cue added, “There’s enough money now, enough large players, that I don’t see how it doesn’t happen.”

In response, shares of Alphabet fell 9%, erasing an estimated $140 billion in market value.

Since then, investors have been awaiting Alphabet’s Q2 earnings to provide clarity around the issue—and it has, at least for Google’s Search business. But other questions remain in terms of one area Google is losing major real estate, which we discuss below.

Search reported 12% YoY revenue growth of $54.2 billion, helping drive Alphabet’s total revenue to $96.4 billion, up 14% YoY. While OpenAI’s ChatGPT, Perplexity’s new Comet browser, the Department of Justice, and others deserve continued monitoring, Google’s resilience in this space is impressive.

On the Q2 earnings call, Alphabet stated that Google is successfully integrating AI Overviews into its core search experience. With 2 billion monthly users across 200 countries, AI Overviews contribute 10%+ additional queries for the searches in which they appear. For Google, this represents a value add and engagement driver, not a disruption.

Google’s Gemini and ChatGPT are battling to become the AI assistant of choice for consumers. To compare, Gemini has reached 450 million MAUs, up 100 million from March of this year, with daily requests surging 50% over Q1. But according to Google’s own data shown in court back in March of this year, ChatGPT had an estimated 600 million MAUs, and likely many more by now. Gemini is gaining ground, though still lags behind ChatGPT.

Alphabet also reported on its launch of AI Mode—a new option displaying as the first tab in Google’s main search menu, next to All, News, Videos, Images, and the rest—in the U.S. and India. The company said AI Mode has already amassed 100 million MAUs.

Capex Now 40% Higher Since the Start of 2025

While Google Cloud revenue reaccelerated four points to 32% to $13.6 billion—a welcome beat considering Q1 had seen a 2-point sequential deceleration —the big news on Cloud is the reported $10 billion increase to capex, now up to $85 billion. This is 40% higher than the $60 billion capex estimate coming into the year, signaling Alphabet's willingness to spend on AI to drive accelerating cloud growth.

Similar to Oracle stock, this surging capex is weighing heavily on free cash flow, and will likely continue to pressure free cash flow in the upcoming quarters. Operating cash flow rose just 4% YoY to $27.7 billion in Q2, yet free cash flow declined (61%) YoY to $5.3 billion. While TTM free cash flow is still up 10% YoY to $66.7 billion, the market is forward looking, and this capex hike implies TTM free cash flow will continue to trend much lower over the next few quarters.

It is understandable why Alphabet is willing to increase its capex, as it is beginning to witness increasing operating leverage in Google Cloud and seeing AI usage proliferate across its core Search business. For example, AI Overviews now serves 2 billion users and processes 980 trillion tokens monthly, doubling since May, a scale which helps explain the explosive compute costs driving Google’s massive investment in Cloud.

Cloud operating margins have expanded significantly, up more than nine points from 11.3% to 20.7%, as operating income rose 141% YoY to $2.8 billion. Prioritizing AI investments in an effort to drive Cloud growth of >30% could see the segment reach a $120 billion run rate by mid-2028, more than double its $54 billion run rate this quarter. Should operating margins begin to expand towards the high-20% to 30% level by mid-2028, versus AWS in the high-30% range, Cloud could generate $30 billion in annual operating income, or more than 3x from today.

This represents more than one-quarter of current company-wide operating income, or a potential massive driver of profitability in the future -- the point here is that Alphabet is essentially sacrificing some FCF growth in the near-term and spending heavily in an aim to reap the rewards of a much larger, fast-growing Cloud segment in the future.

Another market reality adding pressure to Google’s Cloud and AI initiatives is the fact that Microsoft Azure has already set a high bar and is leading the race to monetization by a substantial margin. Whereas Google processes huge volumes of tokens—980 trillion, a figure that has doubled since May of this year—Microsoft’s deeply established enterprise relationships with hundreds of millions of users has unlocked user and revenue growth.

Microsoft’s fiscal Q3 report helped cement the company as the strongest AI player in the hyperscale crowd due to its focus and dominance across enterprise software offerings and deep AI integrations aided by its partnership with OpenAI.

I/O Fund covered Microsoft’s impressive Q3 2025 earnings and Azure’s outperformance on May 15th, which you can read for free here: Microsoft Stock Surges After Q3 2025 Earnings: What Separates Azure from AWS, Google Cloud 

One Serious Concern Remains for Google’s Stock

The intense regulatory pressure on Google to open its ecosystem, even as leading AI assistants are knocking on the door, is a lot for Google to overcome. The DOJ’s proposed remedy—Alphabet divesting itself of the Chrome browser—comes as rivals like Perplexity, OpenAI, and Anthropic are developing assistants that can integrate with other Android apps. The pressure on Google to open its ecosystem is mounting, and the competition is already finding their way in.

Primarily, it’s the loss of Google Search being the default search engine on Samsung devices that poses a larger threat to the company, in our opinion. This is because any loss of real estate – especially on mobile – during a time when there are fierce rivals only creates more headwinds for the stock.

As was reported in early June, Samsung is entering a deal with Perplexity to become the default AI search engine on their devices. According to sources such as Bloomberg, Samsung plans to preload the Perplexity AI assistant and app onto its smartphones, with its AI search built directly into Samsung’s Internet Browser. There could also be AI-powered operating systems built later down the line for multi-agent platforms. This shift could happen as soon as 2026.

Here are a few of the key developments that could lead to Google Search losing market share on mobile, specifically, in the next 1-2 years:

• OpenAI, Perplexity, and Anthropic are developing assistants that can integrate with other Android apps, undermining Gemini usage on devices.
• OpenAI has expressed interest in acquiring the Chrome browser to boost already strong usage of ChatGPT, while Perplexity recently launched its own agentic browser, Comet.
• On April 1st, Google signed a new, non-exclusive agreement with Samsung that includes no restrictions on the smartphone manufacturer loading alternative search products. 
• Anthropic recently introduced the ability of its Claude assistant to integrate with Google Workspace, and OpenAI will soon introduce its own assistant that can connect with Android apps and Google Workspace.
• While Google is also in talks with Apple to integrate its Gemini assistant with Siri, Google Search is unlikely to enjoy the "default" status that it has enjoyed for many years on iPhones, given that Apple is also in talks with other AI rivals.

The takeaway is that Google’s ability to leverage one of its key distribution channels during the generative AI revolution is already compromised. The real threat kicks in when Android smartphone users have the choice to opt for third-party digital assistants over Gemini—subsequently undermining Google’s advertising revenue growth.

One Stock that Will Benefit from Google’s $85 Billion Capex

As I pointed out in the Bloomberg interview above, the best way to position is with stocks that directly benefit from Big Tech’s increase in capex.

While Alphabet is still a very solid business with the major advantages outlined in this analysis, its $85 billion capex commitment could require years to generate meaningful returns in the Cloud. Therefore, we prefer to invest in companies that benefit strongly from capex over those that spend heavily on capex.

Keep in mind that some companies will benefit from capex across all of Big Tech – therefore, the $85 billion from Google is just the start to the tailwinds for specific AI hardware stocks. Investors should factor in there is similar spend from Big Tech: Alphabet, Amazon, Meta, Microsoft and Apple.

Below, my firm outlines a direct beneficiary of Google’s enormous capex spending – which was increased 40% this year alone and was raised $10 billion in the most recent earnings report. After all, one stock’s loss is another stock’s gain.