Alphabet's Record AI Capex Pays Off in Strong Q2 Earnings

Alphabet's record AI capex is paying off, according to its recent earnings report. The tech giant behind Google delivered a strong second-quarter performance, driven by surging enterprise AI demand and the growth of Google Cloud.

The company reported an 82% year-over-year increase in Google Cloud revenue, with operating margins expanding sharply from 20.7% to 35.6%. This margin expansion is a key signal that Alphabet's capital spending is working, with its trailing-12-month Return on Invested Capital (ROIC) sitting at 21.82%, ahead of Amazon's 10.70% and Oracle's 7.99%.

Alphabet's capex hit $44.9 billion in the quarter, which resulted in a negative free cash flow of $5.9 billion for the first time in its history as a public company. However, management framed this as an investment, stating that they aim to invest as long as they see an attractive return on that investment.

The company's valuation is also looking attractive, with a trailing P/E ratio of 17.2x and a forward P/E multiple of 16.6x expected earnings, making it the least expensive large-cap hyperscaler today.