On the eve of Google’s earnings report, Deutsche Bank is supportive: Don’t just focus on Capex—the real surprise may come from Google Cloud

After the market close on July 22, Alphabet, Google’s parent company, will release its Q2 2026 financial report. The current market trading logic is highly focused on a core proposition: in the AI era, is the continuously expanding capital expenditure (Capex) a heavy burden eroding profits, or is it a forward-looking realization of future growth?

In a report issued by Deutsche Bank on July 20, it pointed out that despite recent market concerns over the slowing growth of the search business, delays in the release of the new Gemini model, and ongoing increases in AI investments, the real variable to watch is not Capex itself, but the potential for Google Cloud revenue growth to significantly exceed current expectations. If cloud business demand is released as expected, the incremental profits generated in the coming years will be enough to cover higher AI investment intensity, and the company’s overall profitability still has room for further upward revision.

For investors, the key focus of this earnings report is not whether Capex continues to rise, but how management will position cloud service demand, changes in order backlog, and the pace at which future revenue is recognized. These signals may determine whether the market will reprice Alphabet’s valuation logic under the AI investment cycle.

Google Cloud Is the True Variable That Determines Valuation

Deutsche Bank’s most optimistic expectations center on Google Cloud.

Analysts raised their forecast for Google Cloud’s Q2 revenue growth from 65% to 70%, and expect further acceleration to 75% in the second half of 2026.

This forecast is based on three judgments. First, demand for AI computing power still outstrips supply, with Google recently even renting part of its compute resources from SpaceX. Second, by the end of Q1 2026, Google Cloud's backlog had reached $462 billion, a 400% year-on-year increase. Additionally, some hyperscale cloud providers, including Amazon, have already begun increasing prices for certain cloud services.

More importantly, Deutsche Bank believes that the market significantly underestimates the future revenue scale of Google Cloud. They expect Google Cloud’s 2027 revenue to reach $190–195 billion, while market consensus is only about $142 billion. At a 30% profit margin, this additional revenue alone could contribute approximately $15 billion in GAAP operating profit, equating to around $1 increase in earnings per share.

Capex Will Continue to Rise, but Financing Ability Is Also Expanding

Regarding AI infrastructure construction, Deutsche Bank has also significantly raised its forecast for Alphabet’s future capital expenditure. The company previously expected 2026 Capex to be $180–190 billion, and stated that 2027 would see a “significant increase” over this year.

Considering the order backlog, Deutsche Bank estimates that Google will need about 11.5 GW of computing power to meet current demand, plus another approximately 10 GW under the 2027 baseline scenario. Based on a construction cost of $3–3.5 billion per GW, Deutsche Bank expects Capex in 2027 to be around $325 billion, higher than the previous $250 billion estimate; in 2028, Capex could further rise to $365–370 billion.

However, analysts also point out that because Google uses a hybrid deployment of TPUs and Nvidia GPUs, its unit construction cost is likely to be lower than the market fears.

Meanwhile, the company’s financing ability remains strong. This quarter, Alphabet has completed a total of about $65–70 billion in financing, including a $10 billion investment from Berkshire Hathaway, two rounds of equity financing totaling about $36 billion, up to $40 billion in ATM issuance, and multi-currency senior debt issuance.

As of the end of Q1 2026, the company held about $127 billion in cash and investments, as well as about $107 billion in unlisted securities. Deutsche Bank estimates that by the end of 2027, the company’s cumulative operating cash flow will reach about $420 billion.

Deutsche Bank believes that the issue Alphabet currently faces is not “excessive Capex,” but rather that the market is too focused on investment while underestimating the speed of Google Cloud’s revenue realization.

Search Growth Has Not Stalled; Advertising Budgets Begin to Flow to AI

Regarding Google’s search business, the biggest market concern stems from worries that AI Overview could change traditional search traffic patterns.

However, Deutsche Bank’s channel research found that advertiser behavior is undergoing new changes. While some advertisers are maintaining their original search budgets, an increasing number of brands are starting to shift advertising budgets to AI Overview, while also increasing spending on Google Search and AI-related ads on ChatGPT.

At the same time, SimilarWeb data shows that Google’s website saw both visits and page views improve in Q2 2026 compared to Q1. Based on these data points, Deutsche Bank maintains its forecast for Google Search revenue to grow 16.5% year-on-year at constant exchange rates in Q2, and expects 14% year-on-year growth in Q3.

Analysts believe that, even though the release of the new Gemini model may be slightly delayed, current AI models are already continuously improving advertising efficiency, and the fundamentals of the ad business have not changed in any material way.

Gemini's Delay Is Not the Key; User Growth Continues

The delay in Gemini’s release has become another market focus. Earlier at the I/O 2026 conference, Google said that Gemini 3.5 Pro would launch soon, but as of now, the new model has not been officially released.

However, Deutsche Bank believes that the timing of the model launch has not changed the user growth trend. SimilarWeb data shows that web visits and page views for Gemini continued to climb in Q2, although at a slower pace. Sensor Tower data shows that Gemini App downloads have retreated from their 2025 peak, but total session counts continue to rise.

In a cross-comparison, ChatGPT remains in the lead, but conversation volumes have largely stabilized over the past 12 months; Meta AI saw notable growth after launching Muse Spark; Grok has seen a decline in both downloads and sessions since the start of this year.

Therefore, Deutsche Bank believes that the adjustment in Gemini’s release should be viewed as a short-term event and will not change Alphabet’s long-term AI competitiveness.