On the eve of Google's earnings report, Deutsche Bank shows strong support: Don't just focus on Capex; the real surprise may come from Google Cloud.

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After market close on July 22, Google's parent company Alphabet will release its financial report for Q2 2026. The current market trading logic is highly focused on a core issue: in the era of AI, is the continuous expansion of capital expenditure (Capex) a heavy burden that eats away at profits, or is it an anticipatory fulfillment of future growth?

Deutsche Bank pointed out in its report released on July 20 that despite recent market concerns about the slowdown in search business growth, Gemini model release delays, and continued increase in AI investment, the truly noteworthy variable is not Capex itself, but the possibility that Google Cloud revenue growth may significantly exceed current expectations. If demand for cloud services is released as expected, the incremental profits brought in the coming years will be enough to cover the higher intensity of AI investment, and the company’s overall profitability still has room for further upward revision.

For investors, the key highlight of this earnings report is not whether Capex continues to rise, but how management guides the demand situation for cloud services, changes in order backlogs, and the rhythm of future income realization. These signals may determine whether the market will reprice Alphabet’s valuation logic during this AI investment cycle.

Google Cloud: The Real Deciding Variable for Valuation

Deutsche Bank’s most optimistic judgment focuses on Google Cloud.

Analysts have raised their Q2 Google Cloud revenue growth forecast from 65% to 70%, expecting it to accelerate to 75% in the second half of 2026.

This forecast is based on three judgments. First, demand for AI computing power remains unmet, and Google has recently even rented some computing resources from SpaceX. Second, by the end of Q1 2026, Google Cloud's order backlog scale has reached $462 billion, up 400% year-on-year. Moreover, some hyperscale cloud providers, including Amazon, have begun increasing certain cloud service prices.

More importantly, Deutsche Bank believes the market is clearly underestimating Google Cloud’s future revenue scale. They expect Google Cloud revenue to reach $190–$195 billion in 2027, while consensus forecast is only about $142 billion. Calculated at a 30% profit margin, this extra revenue alone could contribute about $15 billion in GAAP operating profit, equivalent to an increase of about $1 in earnings per share.

Capex Will Keep Increasing, but Financing Capacity Is Also Strengthening

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

Based on order backlog, Deutsche Bank expects Google will need about 11.5GW of computing capacity to meet current demand; in the baseline scenario for 2027, about 10GW more will be added. At a construction cost of $30–$35 billion per GW, Deutsche Bank estimates Capex in 2027 will be about $325 billion, higher than the previous $250 billion forecast; in 2028 it will further rise to $365–$370 billion.

However, analysts also noted, because Google uses a mix of TPUs and Nvidia GPUs, the unit construction cost is expected to be lower than market concerns.

At the same time, the company’s financing ability remains ample. This quarter, Alphabet has completed about $65–$70 billion of financing, including a $10 billion investment from Berkshire Hathaway, two rounds of equity financing totaling about $36 billion, a maximum ATM issuance quota of $40 billion, and the issuance of senior bonds in multiple currencies.

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 expects accumulated operating cash flow to reach about $420 billion by the end of 2027.

Deutsche Bank believes Alphabet is not facing the issue of “excessive Capex”, but rather that the market is too focused on investment and underestimates the speed of Google Cloud revenue realization.

Search Growth Has Not Stalled, Ad Budgets Are Flowing to AI

Regarding Google’s search business, the biggest market concern stems from AI Overview possibly changing traditional search traffic.

But Deutsche Bank’s channel research found advertisers’ behavior is evolving. Some advertisers have maintained their original search budgets, but more brands are trying to allocate ad budgets to AI Overview, while also increasing Google Search and ChatGPT-related AI ad placements.

Meanwhile, SimilarWeb data shows Google’s website traffic and page views in Q2 2026 improved compared to Q1. Based on the data, Deutsche Bank maintains a prediction of a 16.5% year-on-year growth (at fixed exchange rates) for Google Search in Q2, and expects a 14% year-on-year increase in Q3.

Analysts believe that even though the Gemini new model release was slightly delayed, current AI models are already continuously improving ad placement efficiency and the fundamentals of the ad business have not seen substantive change.

Gemini Delay Is Not Critical, User Growth Continues

The delay of Gemini’s release has become another focus for the market. Google previously stated at the I/O 2026 conference that Gemini 3.5 Pro would be launched soon, but the new model has not yet been officially released.

However, Deutsche Bank believes the timing of model release has not changed the user growth trend. SimilarWeb data shows Gemini’s web traffic and page views continued to grow in Q2, although the growth rate slowed. Sensor Tower data shows that Gemini App downloads have declined from their 2025 peak, but total session volume continues to increase.

In comparison, ChatGPT remains in the lead, but conversation volumes have stabilized in the past 12 months; Meta AI has grown significantly since launching Muse Spark; Grok has seen declining downloads and conversation volumes since the start of this year.

Thus, Deutsche Bank believes changes to Gemini’s release schedule are only a short-term event, and will not impact Alphabet’s long-term AI competitiveness.

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