Alphabet Inc (GOOGL.O): AI Momentum Across Search & Cloud, though Capacity Constraints Fuel Higher Spending

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Alphabet Inc (GOOGL.O): AI Momentum Across Search & Cloud, though Capacity Constraints Fuel Higher Spending

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23 Jul 2026 03:22:23 ET │ 19 pages

Alphabet Inc (GOOGL.O)

AI Momentum Across Search & Cloud, though Capacity Constraints

Fuel Higher Spending

CITI'S TAKE

GOOGL’s AI investments are driving results across both Search and Cloud. Buy

That said, the debates post 2Q26 are likely to center on: 1) Timing around

Google’s SOTA FM strategy, led by Gemini 4 (we expect a 4Q launch) with Price (22 Jul 26 16:00) US$342.09

coding tools; 2) Margins as Google acquires incremental capacity from 3Ps Target price US$447.00

S-T, while building its own compute infra.; and 3) CapEx spend growth as Expected share priceFCF turned negative in 2Q. But underlying these debates are greater AI 30.7%

returndemand trends across the enterprise and consumer. GCP customers exceed

commitments by 50%, TPU sales began earlier than expected, and AI-M Expected dividend yield 0.3%

and Gemini app MAUs now exceed 1B and 950M, respectively. We Expected total return 30.9%

acknowledge Gemini’s model roadmap is delayed and 3P compute limits

GCP margin expansion, but we also believe GOOGL’s full-stack approach, Market Cap US$4,168,501M

commitment to SOTA FMs, and potential for greater model velocity with G-

4 can deliver continued strong results; Reiterate Buy rating and $447 TP.

What we Liked: Price Performance

(RIC: GOOGL.O, BB: GOOGL US)

1) AI Leading to Greater Search Usage…AI Mode now has 1B+ MAU, Gemini App

reached 950M MAU (vs. 900M at I/O in May-see Fig 1), and Gemini App DAU tripled

Y/Y with queries continuing to reach ATHs (see Figure 1);

2) …Leading to Improving Monetization Trends—AI Max (GA in April) now has

~500K advertisers, AI Max/PMax users benefit from 15% more conversions at a