The Truth Behind Google’s Insane Earnings

Google just delivered one of the most impressive yet potentially misleading earnings reports that I've ever seen. Revenue reached all-time highs. Google Cloud growth grew by like 82% and their backlog exploded to over $514 billion. But yet, in all of this growth, free cash flow actually turned up negative. So, in this video, I want to break down what the noise is versus the actual signal and talk about the real report underneath these financials. Let's get right into the numbers. At the time that I took this screenshot, we're down 7.5%, but currently the stock's actually down around 6.5%. We're still obviously down a lot versus where we were in the after hours at roughly $353. Now we're sitting at around less than 320. Even though we ended up seeing total revenue for Google surpass $119.8 billion in revenue up 24%, some of the fastest growth rates that we've seen in multiple years. On top of that, we ended up seeing gross profit hit a brand new high of roughly $73.8 billion, 61.6% margins, extremely extremely high, especially whenever you're talking about doing this on $73 billion. Then we need to talk about consolidated net income. And in fact, I wanted to look at operating profit as well. It was roughly about $40 billion and margins were improving as well. But that doesn't really line up with why net income is spiking up so much. The last two quarters have been extreme anomalies. We ended up putting up roughly $62 billion last quarter and then 112 billion this quarter, which beat estimates by like 200%. But essentially, it was that the fact that they ended up talking about putting a stake on SpaceX, this was a long time ago, that's up roughly like 180 times. So that $94 billion holding along with their holdings in Enthropic and many other companies that have done well in this AI boom has led them to add nonoperating income of roughly 97 let's just say 98 billion onto that net income. If you actually take a look at their net income versus how much they put in nonoperating income, you actually get to roughly about $14 billion in net income if that wasn't part of it as well. Even other quarters you still do see without SpaceX IPOing non-operating income pop up all the time. But these are massive anomalies. If you end up looking at the actual taxes that they ended up paying, that also spiked up. So this was sort of the difference in the operating profit versus what actually we saw for net income. They paid 26.5 billion in taxes. So very very big tax quarter, but it is helping them lock in $112 billion of gains this quarter. On cash and cash equivalents, this one actually surprised me because we're going to go in to talk about how much they actually have been spending on capex and building out data centers. But what we ended up seeing is that they now have roughly $55.9 billion in cash and cash equivalents. And that does not include short-term investments. This is purely cash. On top of that, I wanted to break down some of the revenue segments. Google Search, for example, ended up still seeing an increase of roughly 16.7% or 63 billion of their total amount of revenue came from this segment alone. This was highlighted by two different metrics. One, the amount of overall ads that were actually given to Google search users up 13%. And then the price that people were willing to pay on the Google ecosystem for Google Ads also increased by 3% year-over-year. The amount that they're increasing by is decreasing a little bit, but it's still growth rate. It's just decelerating growth rate, but it makes up for with the large amount of new ads that were overall served. So, Google search business will continue to do better even if they have the same amount of users. They also came out and said, "This quarter we reduce the cost of AI mode responses to the lowest level since launch, even as we have brought more advanced AI capabilities. But essentially, what they're trying to say here is that the AI mode responses are at the lowest level since launch. They're getting better at serving up that AI mode, which is essentially Gemini in search. On top of that, we have YouTube. YouTube has been in this overall sort of declining trend of growth. Now, if you look at the overall revenue, it's continuing to climb, but we want it to grow at those like high teens rates. Whenever it got down to roughly 8.7%, that was not a great sign. That is starting to recover now, and hopefully that continues to recover, but Google Ads business is roughly up about 12.8%. One of the interesting parts about Google's ad business is this is not the entire YouTube ads business. You also have subscriptions like premium services where people are paying that falls under subscriptions, devices, and platforms, but that does not show up here. So, they don't just show YouTube's entire advertising. And I've seen a lot of people who end up signing up for YouTube Premium. That actually makes YouTube's ads business grow much slower. And then, of course, we need to talk about by far the most important part, which is Google Cloud. Google Cloud is up 81.8% in their overall Google Cloud revenue to $24.7 billion. Now, there's a couple different ways that we'll break this out, but essentially one of the ways that Ultimator Capital, this is Brad Gersonner's company, ended up doing it was looking at the net new ARR added to Google Cloud, which now it just spiked up to 18 nearly $19 billion added quarter over-arter, which is roughly twice as high as what it was the quarter before. Okay? And whenever you look previously, they've been able to add on $2 billion, $3 billion, $4 billion. Spiking that up to 189 billion is going to require a lot more capital because you need to set up those data centers. Although we're end up seeing this massive improvement in overall amount of growth, they're doing this at better margins, which came at a massive surprise to many investors. The operating margin on Google Cloud has gone from 3% three years ago to 35% in three years. Every single quarter has been better than the last. They also said that part of this Google Cloud revenue was actually selling TPUs. I think that once this gets to scale, they'll break this out into their own revenue line, but for now it's under Google Cloud, which I think is appropriate regardless. But some of this is being seen as TPU sales and it's really going to be a lot of revenue overall being realized in 2027. So although there is this 81.8% ramp, a lot of people are going, "Yeah, but it's outside of Google Cloud. We're also looking at hardware sales and these sort of things." That makes up for a small percentage of what it's going to be going forward. They also talked about some of that Google Cloud revenue also being Whiz revenue. This was one of their recent acquisitions like a $33 billion acquisition for a cyber security cloud platform name where they said that they have seen a more than 45% quarterover-arter increase in the number of AI workloads scanned and protected by our security platform. This is not just for Google cloud. This goes across Microsoft Azure, AWS and many other clouds as well. Whis is agnostic to the cloud platforms. But the growth is extreme here and we didn't really get to see this before whenever Whiz was a private company. But now that it's under Google, we get to start to see some of these numbers and 45% quarter overquarter increases is really exciting. A lot of that actually has to do with the backlog as well. As we continue to scale up, we're not only growing by 81%, but what's to come next is higher than ever. A lot of the time whenever you bookmark that 81% growth, you're going to be eating into this backlog, but it's actually expanding. So whenever you talk about supply and demand imbalances, it's actually gotten wider for Google quarter over quarter than it was back whenever we were at $467 billion. So they still can't keep up with demand and it's actually gotten worse than where we were a year ago, a quarter ago, wherever. They said given that supply constraint environment, we plan to expand to use thirdparty capacity in Q3 as a bridging strategy while we build out more internal capacity. This strategy allows us to keep growing our customer base and capture greater overall value. I really wanted to highlight this because this was going to the sort of operating margin conversation that I said earlier. They did say that operating margin might end up taking a big hit because they're going to be giving massive payments to companies like SpaceX and potentially INE or Nebus or Cororeweave or Nscale or whatever company that they end up partnering with. But this sort of bridging strategy goes to talk about like if if you partner with these businesses, Nebius, Corewave, some of these these are five-year deals. They're not going to be doing very small deals. I mean they might like they did with SpaceX threemon deals. It's not super big, but they even then they signed like I think it was a 30month total contract. So these bridges can actually be very long before you can build that capacity. And there could be a potential for some of these neoclouds to really benefit from Google seeing a $514 billion backlog and really want to try to get through some of that demand. But this is going to cost a lot of money. And that brings us to capital expenditures. First up, with a lot of their money that's outflowing from the business, we end up seeing buybacks essentially come to a complete stop. The last two quarters, they've given nothing back to purchase back common shares of the business. They used to do about 15 to 16 billion a quarter, but they have not ceased to continue to pay and also increase their overall dividend. So, dividends are still coming up. Now, cash from operating activities was a little bit shy from where we were in the quarters before, but if you look year-over-year, it was only 27 billion. Now, it was $39 billion. So, there still is a large increase there. But they ended up spending $44.9 or $45 billion on new data centers, new offices, and essentially capital expenditures. This is going to bring down free cash flow. They said, "We are both very committed and very confident at being at the frontier for the next generation of Frontier. You are going to need much larger base models. We are now training Gemini 4 and we're being very ambitious with it. I'm very excited by the progress I'm seeing internally on Gemini 4, but like they said, this is going to need way bigger training operations, lot more spend. So get used to spending this $44 billion, 45 billion. in fact raise it even higher than what you thought previously. They're now raising their capex guidance to a range of 195 to $25 billion or let's just round it to 200 billion. That would mean on a per quarter basis we need to spend at least 50 billion in order to get to this total capex guidance. We did not just spend 50 billion. So there's going to be a quarter that comes in the rest of the year that's even higher than this one up from our previous estimate which they gave 3 months ago for 180 to 190 billion. This increase is in the range is primarily due to an acceleration in the delivery of capacity to meet growing demand. So they're not blaming it on memory. They're not blaming it on cost of energy. They're not blaming it on anything like this. They're just saying we want to run faster so we're going to spend more. They also came out and said, "As previously shared, we expect our capex to increase significantly in 2027 and we'll provide more details at a later date." UBS and JP Morgan came out and said that 2027 might be in the range of 325 to 375 billion in capex. So essentially almost a 70% increase year-over-year. Again, going from full year 2026 to full year 2027. So you look to companies like AMD, Broadcom, Nvidia, there's going to be so much more spend on whether it's Neoclouds or the actual chips or the networking or the photonics. The buildout is looking to continue to happen because Google has these very secure backlogs that they feel confident that their customers will come and pay. That brings us to free cash flow. Free cash flow was negative for the first time since like 2003, down $5.8 billion. It's pretty stark contrast to where the average Google investor is used to trading this company, being very cash flow positive, bringing in more money. But I honestly think that this is going to be a different focus for Google and they're going all in on artificial intelligence. They see a massive amount of spend and a large amount of capital expenditure that's needed to be a top player in who is going to actually offer this data centers to open AAI enthropic to their own internal compute to Grock to Meta who knows but they want to be a frontier data center player and model provider that's going to need a lot of money the interesting part is I don't think that they're going to be alone Microsoft Amazon all of these companies they're down today because I I think people are realizing that they're also going to come out and have higher thanex expected capex guidance. It feels like we are in very early innings of what feels like a secular shift across multiple areas in our core information businesses. Just the possibilities when I see what all we can do with the absolute frontier capabilities. There's still a lot of work ahead to translate all of that into experiences for our consumer users. We are still very early innings. A secular shift across multiple areas. just insane. Google's rule of 40 has also hit another new high for like a multi-year high at 64% off from 63% a quarter before. If you want growth and growth that companies are willing to pay for, this is like where I love to invest. Companies that really see an opportunity and are spending to go capture it, Google is doing that. They're not being safe. They don't want to lose their advantage. They're willing to fight to win. And that's why we're seeing increased growth and increased margin as well on the same time. On top of that, they're also investing in robo taxis with Whimo, in drones with Wing and Quantum and XR glasses. And there's so many other areas that Google competes in. So the fact that they're also doing well with these, putting out new models or delivering over a million home deliveries with Wing, it just makes you realize that the avenues for success on Google is way more than 99% of businesses that are out there. But then that brings us to valuation because today it is down 7% and they just ended up putting up an extreme amount of earnings based on SpaceX's new valuation. But that's real money for them. They'll likely sell off that SpaceX holding that they have worth what was it $94 billion and then put that all back into data centers to increase cloud growth. So the PE ratio ended up dropping down to 15 times or roughly 16 times and the forward PE is now sitting at 23.6. 7 times which is not based on the marktomarket gains of SpaceX. A forward PE of under 24 times that does not include marktomarket gains. That's very real. That was a little bit of a review for Google. I still love this name. The market hates the spend, but obviously with my portfolio being extremely AI infrastructure dependent, I obviously knew a lot of this spend was going to come and likely to happen in 2027 and then surprise investors in 2028 that it's even higher than that. That's my hope. But on the other side, my belief is that consumers and enterprises are going to be willing to pay Google for these services. So they're happy to pay Nvidia if they know on the other end that their consumers are paying for Google 1 or Gemini or tokens on a peruse basis. Whatever that ends up coming out to be. If they have customers to pay for it and margins are improving, they're going to be willing to put more money into it for next year. Let me know what you guys think about Google. Are you buying here? Is this a buying opportunity or something where you're selling? If you guys like these sort of stock market updates, make sure you subscribe. We're also live every single day giving you guys up-to-date market