With hyperscalers committing enormous sums to AI infrastructure, in this earnings season investors are looking to cloud revenue growth as evidence that sufficient demand merits all the spending.

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Alphabet (NASDAQ:GOOGL) appeared to provide that reassurance in the second quarter. Google Cloud revenue surged 82% year-over-year, significantly exceeding Wall Street’s forecast for 63% growth.

Management attributed the strength to several areas. Cloud infrastructure expanded even faster than the segment as a whole, while demand remained robust for core cloud services, enterprise AI offerings, and AI-related infrastructure. The initial delivery of TPU systems to clients’ data centers also boosted the results. However, the company stressed that Google Cloud’s growth would still have accelerated meaningfully even without those sales.

Other operating indicators also pointed to continued momentum. The Cloud backlog expanded over $50 billion sequentially to $514 billion. The rate of new customer additions more than doubled from a year earlier, while existing customers used more than 50% above their contractual commitments.

However, all of that did little for the stock, which fell by 7% on Thursday following the readout, as the elevated spending levels appeared to spook investors.

Alphabet’s 41% YoY increase in operating cash flow, from $27.7 billion to $39.1 billion, was not enough to keep pace with its accelerating investment in AI infrastructure. The figure also came in below the Street’s $45.6 billion forecast. As capital expenditures surged, free cash flow swung sharply into negative territory.

Capital spending almost doubled from $22.4 billion to $44.9 billion, broadly matching the $44.8 billion expected by analysts. Alphabet is continuing to expand capacity rapidly as demand from both Google Cloud customers and its own products outstrips available computing resources.

The result was a sharp deterioration in free cash flow, which fell from positive $5.3 billion in the year-ago period to negative $5.9 billion. That compared with Street expectations for roughly positive $0.1 billion.

With compute capacity still constrained, Alphabet raised its 2026 capital expenditure forecast to between $195 billion and $205 billion, up from its previous guidance of $180 billion to $190 billion. The company also said spending is expected to rise significantly again in 2027, although more specific guidance will come later.

While it’s clear how the market felt about the results, scanning the print, Freedom Broker analyst Saken Ismailov takes a more balanced view, seeing the results as “neutral overall.”

“Strong Google Cloud growth confirms robust demand for AI infrastructure, but the increasing investment burden and related expenses limit the outlook for long-term margin expansion and offset the positive valuation impact,” Ismailov explained. “Our expectations for continued demand for cloud infrastructure and enterprise AI solutions were confirmed, although the actual acceleration in Google Cloud was stronger than assumed in our previous model.”

Given the stock’s correction over the past quarter (down by 21% from its peak), Ismailov has upgraded his rating from Hold to Buy. The analyst’s $400 price target implies the stock will gain 25% over the next 12 months. (To watch Ismailov’s track record, click here)

Ismailov now joins 30 other analysts in the bull camp, while an additional 5 Holds can’t detract from a Strong Buy consensus rating. The forecast calls for 12-month returns of 34%, considering the average target clocks in at $427.35. (See GOOGL stock forecast)