AI Market Hinges on Google... Key Issues: Investment Efficiency and Monetization [Click eStock]

Alphabet to Announce Earnings on July 22 (Local Time)
Operating Margin Expected to Hold Up
"Key Issue: When Will ROIC Rebound?"

The market is closely watching the earnings announcement of Alphabet, the parent company of Google. There is analysis suggesting that the future AI market will be highly sensitive to the level of AI-related capital expenditure and monetization.

On July 22, KB Securities stated in a report, "For hyperscalers such as Google and Amazon, the most important thing in their earnings is not the growth of earnings per share (EPS), but whether their astronomical capital expenditure is actually translating into profits," adding, "Alphabet has been passing this test relatively well."

Alphabet will announce its earnings after the market closes on July 22 (local time). Based on consensus forecasts, revenue is expected to be approximately $117 billion, marking a 21.3% increase year-on-year, while EPS is projected to reach $2.87, up 24.2% over the same period last year.

The primary area of interest is in the company’s cloud business. Second quarter cloud revenue is forecast to reach $22.2 billion, growing 63.3% on a year-on-year basis. Its backlog from the previous quarter stood at approximately $460 billion, a significant rise from $108.2 billion in the second quarter of 2025. The company expects to recognize about half of this amount as revenue over the next 24 months.

The search business is also expected to remain solid. Second quarter search revenue is projected to reach $63.4 billion, an increase of 17.0% year-on-year. In the first quarter, the company achieved double-digit growth and its all-time highest query volume, alleviating some concerns that AI would erode search. For this earnings report, the monetization of AI Overview ads and the increase in Gemini users are also cited as key points to watch.

The main issue is the scale of investment. Alphabet’s capital expenditure-to-revenue ratio is expected to rise from 22.7% in 2025 to 38.2% in 2026 and to 43.2% in 2027. This marks the company’s most aggressive investment cycle in its history. As a result, free cash flow is projected to bottom out between 2026 and 2027, before rebounding in 2028.

However, the impact on profitability has been assessed as limited. Although depreciation expenses will increase significantly from 2026 onward, the operating margin is projected to rise from 32% in 2025 to 36% in 2028. This suggests that profitability in the cloud and search advertising businesses is offsetting the increase in costs.

Nevertheless, investment efficiency remains an open issue. KB Securities forecasts that Alphabet’s return on invested capital (ROIC) will decline from around 30% in 2024 to roughly 20% in 2028. The report explains that, while investment has expanded rapidly, returns have not yet caught up with the pace at which capital is being deployed.

KB Securities analyst Kim Se-hwan commented, "Alphabet has managed to maintain its operating margin even amid its biggest-ever investment cycle. However, since the rate of investment is moving so quickly, the key going forward will be when ROIC begins to rebound."

This content was produced with the assistance of AI translation services.