BofA: Alphabet (GOOGL.OQ) 2Q Preview — Estimates Raised on Cloud Strength, Partially Offset by FX; Buy
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Key Views
Cloud is the primary upgrade driver, with 2Q revenue projected at $23.2 billion (+70% YoY) and an operating margin of 33.0%. The existing backlog reportedly supports at least $230 billion in revenue over the next eight quarters. Search revenue is expected to grow 17% YoY to $63.6 billion despite softening consumer goods and travel demand. YouTube ad revenue is projected at $10.8 billion (+10% YoY).
Anthropic's valuation increased from $380 billion in 1Q to $965 billion in 2Q, generating an estimated $80 billion revaluation gain for Alphabet's operating profit. This lifts the 2026 EPS estimate by 36% to $19.70.
Capital expenditure remains a significant pressure point. 2Q capex is projected at $50.1 billion (+123% YoY), with 2026 full-year guidance potentially raised approximately 5% to $190–200 billion. Consequently, 2026 free cash flow may decline roughly 75% YoY to about $18 billion. BofA expects no share buybacks through 2026, with a $40 billion at-the-market issuance planned starting 3Q.
Outlook
Key catalysts include new AI search ad formats, agentic search capabilities, the Gemini 4 fall launch, and external TPU commercialization. Principal risks include tougher 3Q comparisons, elevated valuations versus historical averages, OpenAI's advertising expansion, and capital rotation toward AI IPOs. BofA projects 3Q net revenue of $108.8 billion and GAAP EPS of $3.03.
Key exhibits
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