Here’s the Portfolio’s Game Plan for Google

Following Alphabet’s (GOOGL) Q2 2026 results, we are maintaining our $410 price target, as others on Wall Street, such as Piper Sandler, Morgan Stanley and UBS, lift their respective targets to $400-$415. We are, however, contemplating an upward rating change given what we saw in the company’s core search and advertising business, the dynamics between the backlog at Google Cloud and both revenue and margin implications in the coming quarters.

You’re likely wondering, “What are they waiting for?” The answer is next week we have quarterly results from the other hyperscalers, and given the capex increases at Alphabet and Tesla (TSLA), odds are high we’ll see them follow a similar path. The concern we have is that will keep pressure on GOOGL shares as well as those for the other hyperscalers. Other near-term concerns include incrementally more hawkish Fed comments next week and renewed geopolitical tensions in response to President Trump’s new tariffs. Those have the potential to push GOOGL into an oversold condition considering the current relative strength reading just over 31.

As we share those thoughts, we recognize it is very difficult to catch a stock as it bottoms out, but our thinking is we would rather wait until more known unknowns are revealed and that added weight, good or bad, is reflected in the shares. Those revelations will also determine if we see a test of support for GOOGL at the 200-day moving average near $323.

While we wait on all that, let’s discuss why we are inclined to revisit our GOOGL rating with an upward bias.

Out of the gate, there is the more than 20% pullback in the shares from their May peak.

Second, Search revenue grew 17% to $63.3 billion, with retail and finance advertisers leading the way. During the earnings call, Alphabet management explained that folding AI Overviews and AI Mode into a single search experience is pulling in more queries without cannibalizing the ad business. YouTube ads grew 13% to $11.1 billion, helped along by a World Cup viewership boom that made it the most-watched World Cup in the platform’s history. Moreover, the cost of serving those AI answers came down in the quarter leading the operating income generated by Google Services to grow far faster than revenue. In other words, internal AI adoption and cost containment drove not only 170 basis points of operating margin expansion, but the incremental profit margin per revenue dollar was north of 50%. That’s up from 24% in Q1 2026.

A similar analysis applied to Google Cloud reveals an even higher incremental operating profit margin per revenue dollar of almost 212%, up from 203% in Q1 2026. That explains why the reported operating margin at Google Cloud was able to move above 35% in Q2 2026 as the business’s revenue climbed more than 80% year over year and roughly 24% sequentially. In the year-ago quarter, Google Cloud’s operating margin was just under 21%.

As we think about that and the incremental profit dollars the company is achieving, let’s factor in that $514 billion backlog figure for Google Cloud the company had exiting Q2 2026. Quickly it was up some $50 billion quarter over quarter, which was twice the revenue reported for the quarter. But here’s what really caught our eye: Google management expects to convert just over half of that into actual revenue over the next two years. Ball park that at ~$260 million and it’s roughly a six-fold increase compared to the Google Cloud revenue delivered in H1 2026.

In our view, that explains why Alphabet raised its 2026 capital spending guidance to $195 billion–$205 billion, up from $180 billion–$190 billion and reiterated another leg up in next year’s capex. We are not fans of the company’s negative free cash flow for the quarter and the prospects for it to continue in the coming ones. However, as we discussed in yesterday’s video, Alphabet isn’t the first company we’ve seen where its cash flow was in the red as it invested for what’s to come. The difference here is the backlog levels being put up for Google Cloud that provide support for that buildout, and the company’s ability to monetize that added capacity.

Our view is that the latter will be the real focus when Wall Street takes another look at Q2 2026 hyperscaler earnings and guidance. The ones, like Alphabet, which deliver on that front, will confirm they are investing properly to meet demand in the coming quarters. That monetizaion is our area of focus, and will determine our degree of bullishness on their shares. Meanwhile, Alphabet ended the quarter with a well-positioned balance sheet, holding $242.5 billion in cash and securities against $98.2 billion in debt.

Thoughts on the Portfolio’s Chip Stocks

Mow, let’s turn to the Portfolio’s chip positions, namely Marvell (MRVL), Broadcom (AVGO) and Nvidia (NVDA).

We echo the frustration shared by members about the renewed pressure on the shares in the face of rising capex levels at Alphabet and Tesla. However, given our comments above, we will stand on the sidelines when it comes to those shares until the next few trading days and what they bring play out.

Should we make any moves with these existing chip positions, given existing position sizes and cash on hand, odds are they will be on the smaller size.

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At the time of publication, TheStreet Pro was long AVGO, GOOGL, MRVL, and NVDA.