Google Stock is Falling After Earnings - Here's What You Need to Know

All right, everyone. Today is the day. Google officially kicks off the Hyperscaler earnings reports, and they just reported their earnings. So, let's go and take a quick look at the numbers. Wow, Google Cloud accelerated to 82% year-over-year revenue growth, and operating income at Google Cloud is exploding. Google's revenue is also up 24% and continuing to accelerate, and operating income is up a whopping 30%. So, right away, this looks like a fantastic earnings report from Google. So, the market must be loving it and the stock must be up in after hours. So, let's go take a look at the share price now. What? All right. But in all seriousness, I thought that this was a great earnings report from Google. But there are a few things that I think the market is getting hung up on. So, we're going to discuss all of it in this video. This is going to be my full earnings analysis, even covering the conference call highlights for Google's second quarter earnings report. In my video yesterday, I also said that I am going to be covering Service Now's earnings, but just for the sake of speed and timeliness and getting these videos out as quick as possible, I am going to be covering Service Now tomorrow on my channel. So, if you want to see those earnings and my full analysis, then make sure to subscribe. But with that being said, let's stop rambling and let's get right into it and hop in to my screenshots from Google's earnings report. All right, so starting from the top, here are the highlights from the earnings report. revenue was up 24% or 23% on a constant currency basis to $119.8 billion. Google services revenue was up 15% led by 17% growth for Google search and other revenue, 15% growth in Google subscriptions, platforms, and devices and 13% revenue growth for YouTube ads. 13% revenue growth for YouTube is actually quite strong by the way and is an acceleration to YouTube ads business. As I joked about earlier, Google Cloud revenue is up 82% to 24.8 billion and Google Cloud added roughly 4.8 billion in revenue quarter over quarter, which is about 25% quarter-over-arter revenue growth. So, Google Cloud is exploding right now. The operating margin for Google as a whole also expanded by 2% and operating income increased by 30%. The net income growth was massive with earnings per share growing by 298% and earnings per share coming in at $9.11. But this was mostly because of investment gains like the SpaceX IPO. And without these investment gains, earnings per share would have been about $2.85 as we are going to see. This next screenshot is simply an overview of the quarter and the highlights. And again, we have 24% revenue growth, 17% year-over-year revenue growth for search, 82% revenue growth for Google Cloud, and a 514 billion backlog. YouTube adds up 13% and 950 million Gemini app monthly active users. Now, so across the board, this was a very strong quarter for Google. All right, moving on to the income statement. Once again, revenues were up 24% and revenue growth is accelerating because last quarter revenues were up 22%. Operating income again is up 30% and we can see that there was about a $98 billion gain from investments in other income which caused net income to be $112 billion for this quarter alone which is just insane. But as I said without the investment gains earnings per share was about $2.85 which was slightly below analyst estimates of $2.90. So the earnings per share excluding the equity gain impact actually missed by about 5 cents. Earnings per share also would have been up roughly 23% without those equity investments factored in which is still very strong growth to the earnings per share. We can also see that search revenue slightly missed but across the board everything else was a beat and a pretty massive beat. And in my opinion again this was a very strong quarter from Google. All right moving on to Google's earning slides. Again, we can see that revenue accelerated to 24% year-over-year growth versus 14% year-over-year growth last year. So, over the past year, Google has accelerated its revenue growth by 10 whole percentage points. And it's pretty incredible to see Google accelerating their revenue on $120 billion of quarterly revenue. The law of large numbers apparently does not apply to Google and the hyperscalers right now. This is pretty incredible. Then again, we can see that the operating margin also expanded to 34% for the company for this quarter. All right, moving on to the next slide. This one shows us all of Google's different business segments and their growth rates. So, subscriptions, platforms, and devices grew by 15% year-over-year. Google network saw a 1% revenue decline. YouTube ads again saw 13% growth. And then Google Search and others saw 17% year-over-year growth. This collection of businesses, which I would call Google's core businesses, did see their revenues grow by 15% overall and their margins expanded by 1.7% to 41.8% producing operating income of about 39.5 billion. So, all of these businesses saw double-digit growth and margin expansion on a year-over-year basis. The real standout, though, was Google Cloud. This was an absolutely monster quarter for this business segment. Google Cloud produced $24.8 billion in revenue with 82% revenue growth as I have said about four times now. Whereas last year in the second quarter, Google Cloud grew 32%. So year-over-year, Google Cloud's revenue growth rates have accelerated by 50 percentage points. That is ridiculous. And Google Cloud is seeing a tremendous amount of demand. Now, at the same time, Google Cloud's operating margin expanded by 15 percentage points, which led to Google Cloud's operating income nearly tripling to $8.8 billion for the one quarter alone. This is a massive expansion of profits for this business segment. This next screenshot also shows you the ridiculous revenue acceleration for Google Cloud, and it has been skyrocketing for the past four quarters and continuing to accelerate now at 82% year-over-year growth. This is the most growth that Google Cloud has seen in years. I think that this is probably the best growth that the company's actually ever seen. For example, in the second quarter of 2021, they were growing at 54% and then decelerated over the next 2 years. Now, there is a very very clear reaceleration for this business even at a larger scale. Now, moving on, let's start to talk about cash flows. And here we can see that operating cash flow was up 41% year-over-year for the second quarter to $39 billion. However, capex increased by 100% and came in at 44.9 billion, which means that Google overall produced negative free cash flow of about $5.9 billion this quarter. This is the first quarter that Google has now produced negative free cash flow due to all of their capital expenditures. And I think the market is starting to get shaky about this because Google is now having to issue shares and raise debt to continue funding their massive capital expenditures. It's no longer being funded by organic cash flows officially as of this quarter. The large increases to capex also caused Google's trailing 12 months free cash flow to decline by 20% down to about $53.3 billion now. And as I have said in recent videos, the decline to Google's free cash flow is going to make the stock look extremely expensive if you're trying to value it off of a price to free cash flow basis because now Google is around 80 times free cash flow after this earnings report. So what I am doing for the time being is I am focusing on the revenue growth rates for these businesses and Google's revenue growth is accelerating. As I have said already, Google Cloud's revenue growth is massive. And I believe that this suggests the capital expenditures that Google is doing is clearly paying off because their Google Cloud business is exploding and the overall topline of the business is accelerating as well. Then the second metric that I am focusing on is the operating cash flows. I want to make sure that the operations of all of the hyperscalers while they're investing in capex are actually producing more cash. And for Google, that is 100% the case with their operating cash flow growing 41% on a year-over-year basis for this quarter. So, so far, in my opinion, it does look like Google's capex is paying off and producing a positive ROI for the business because revenue and the operating profits are accelerating and growing strong. But in the meantime, we are seeing trailing 12 months free cash flow decline significantly and Google's free cash flow for this quarter again was officially negative, which I don't think the market liked. Moving on to our next screenshot, this is Google's cash flow statement. And I know that there is a lot going on here, but don't worry, I'm going to hold your hand and it's going to make a lot of sense. So, right at the top, we can see that Google removed $135 billion worth of investment gains year to date and $99 billion worth of investment gains in this one quarter. This was what caused the net income to grow so significantly. So, they're just removing this because it wasn't an actual cash flow for the business. Then, moving down, we can see that operating cash flow for this quarter once again was 39 billion versus 27.7 billion last year, which is that 41% growth. Year-to date, Google has produced about $85 billion of operating cash flow. Now, let's take a look at the purchases of property, plant, and equipment, which is the capex for the business. And for this quarter, capex was roughly 45 billion, which caused free cash flow to be negative. Year-to- date, capex has been 80.6 billion. So year-to- date, Google's free cash flow has been about $4.3 billion. And I believe that this trend of negative free cash flow is actually going to continue over the coming quarters. And in 2027, there is a chance that Google's going to be free cash flow negative. Now, as we move down the cash flow statement, we can see that repurchases of common stock has completely stopped. Google is no longer buying back shares because they are investing every available dollar into capex. That is a pretty large change from them continuing to buy back shares on an ongoing basis over the past few years. We can also see that Google raised $30.5 billion from issuing shares this quarter. So not only did they stop buying back shares, but now they are also diluting to raise more money to fund their capex and invest as much money as they can into their Google cloud growth. Then additionally, we can see that there was proceeds of about $25 billion from debt this quarter and they have raised about $56 billion of debt so far year to date. So to summarize the cash flow statement, Google's free cash flow is disappearing and was negative on this quarter. The repurchases of common stock have stopped and they've actually flipped to Google now issuing shares and diluting. And Google has raised $56 billion of debt to continue funding its capex year to date. This is a massive investment that Google is doing now. And I think that you can see why the market is beginning to get skeptical on this because it's no longer being funded by organic cash flows and they're officially diluting and raising a lot of debt to continue investing in capex. So to put that simply, their capex better freaking payoff or this is going to be a significant waste of money. That is how the market is viewing this stock now. All right. Okay, now this next screenshot shows us that in the trailing 12 months, operating cash flow is now sitting at $185.7 billion and trailing 12 months free cash flow is now at 53 billion. Now, when I start to value Google stock, I am going to be using the 185.7 billion of operating cash flow right here. So, now let's head over to Stock Unlock really quickly. And there are some metrics that I want to show you from this earnings report. The first one is Google Cloud's revenue growth. Look at the acceleration to Google Cloud revenue. It is now at $78 billion in the trailing 12 months. And if we take a look on a quarterly basis, just look at how much Google Cloud's revenue growth is accelerating. They are now doing roughly a hundred billion on an annualized revenue run rate basis. And this business is again just exploding. Now, if we also take a look at Google Cloud's operating income, we can see that it was producing negative operating income not that long ago. And now in the most recent quarter, operating income is at 8.8 billion. In the trailing 12 months, operating income is now at 24 billion for Google Cloud as well. So, Google Cloud is materially impacting Google's overall profitability now and [clears throat] expanding the company's margins in a pretty big way. Now, another cool chart that I have made here is the Google Cloud operating income and then Google's other operating income from the remainder of their businesses. And back here in 2020, we can see that Google Cloud produced 5.6 billion of operating income for the business. So it was actually impacting the profitability to the negative side. Well, now this has flipped and you can clearly see that Google Cloud is materially growing Google's overall operating income and actually causing it to accelerate. This is great to see and this is one of the reasons why I believe that Google's investments in capex is paying off because their operating income is also accelerating largely from Google Cloud. All right, so now let's talk about Google's valuation. And here we can see that the market cap is $4.2 2 trillion in after hours trading now. So we're going to enter that into our calculator and then we're going to divide it by $185.7 billion of trailing 12 months operating cash flow now which puts Google at 22.6 times operating cash flow. Now if we take a look at Google's historical price to operating cash flow here we can see that its historical high in 2021 was about 24 and the previous highs before that were consistently around 22. So Google on a trailing 12 months price to operating cash flow basis is actually still on the higher end of its ranges relative to where the stock has sold over the past about 20 years. So it is still on the upper end of its ranges and on the upper end of its band. So personally just on that basis I don't think that Google is offering a steep discount or anything like that right now because again just relative to how the stock has traded it is still right at its highs. Now I also ran a quick DCF for Google using its operating cash flows and I inputed the most recent metric of 185.7 billion here and over the next 3 years I am using analyst estimates and saying that they will compound their operating cash flow by about 21% annually over the next 3 years. Then I am also saying that Google will trade for an 18 price to operating cash flow which is their 10-year median as you can see right here in this chart. And you can also see that Google is clearly way above their median right now. So in this DCF, I'm saying that they will get back to their historical averages. And with these inputs, we get a 12.5% compounded annual growth rate to Google share price over the next 3 years, a fair value of 366 bucks, and a future stock price of 484 bucks by about 2029, which is a 42% total return. So basically what this DCF is showing us is that over the next three years if Google can actually hit analyst estimates and grow their operating cash flow by 21% annually and get back to their historical average 18 price to operating cash flow then the stock is about fair value right now. And this is the main reason why I am not a buyer of Google shares right now is because if they hit analyst estimates then the stock is roughly fairly valued. As I shared in my YouTube video yesterday when I did a pre-earnings analysis, I do not think that this is a large enough margin of safety for me, especially when my pretty conservative meta DCFs are yielding much higher returns. For example, in my meta DCF with 15% annual operating cash flow growth and a 14priced operating cash flow, then Meta gives us a 19% compounded annual growth rate, which obviously is much higher. And I think that this is also a more conservative DCF. So relative to the other stocks available in the market right now, I do not think that Google is the best opportunity just in my opinion and I think that there are more attractive stocks out there. So for me, I have chosen to purchase Meta and Amazon over Google. But I do still think that this was an incredible quarter from Google and they are clearly killing it, especially with Google Cloud. Now the last thing that I want to talk about is the conference call highlights because Google was actually flat in after hours trading until these things were said on the conference call. So the first point here is that they said that Google search revenue growth should start to slow down next quarter as they start to lap strong quarters from last year where Google search revenue started to accelerate. Basically to put that simply they are saying that Google search revenue growth should be lower next quarter. Google also raised its capex guidance to 195 to 205 billion for 2026. Then they said that capex is expected to significantly increase in 2027. This ultimately leads me to believe that Google will be free cash flow negative for the foreseeable future because again they just increased their capex guidance and they believe that capex will grow significantly in 2027 and in this most recent quarter Google's free cash flow is now negative. So if this trend continues and capex continues to grow at a faster rate than operating cash flows then free cash flow should be negative next year. And these are the main reasons that I heard on the conference call as to why Google shares started to sell off and why the stock is now down 4.2% in after I was trading at the time of recording this video. Again, I was watching the share price as the conference call was going on and when these things were said, the stock started to fall. But with all that being said, that is going to wrap up the video and that's going to be my Google Q2 2026 earnings analysis. Overall, I think that it was a fantastic quarter, but I think that Google share price is arguably pricing it in. And I also think that's partly why the stock sold off in after hours. The phenomenal performance seems like it was priced in once again. But with all that being said, if you enjoyed the video, then please remember to leave a like on it. And if you want to stick around and see my Service Now earnings analysis for tomorrow, then please remember to hit that subscribe button. As always, thank you so much for tuning in. I truly do appreciate it. And I hope to see you again in tomorrow's