Alphabet Q2 earnings: Anthropic markup masks real cloud test
Alphabet is expected to post a massive Q2 earnings beat on Wednesday due to an Anthropic accounting markup, but investors will focus on whether cloud revenue can outpace a looming $190 billion capex burden.
Alphabet will report second-quarter results on Wednesday after the bell, with shares trading near $355. A 97% probability of an earnings beat is already priced into prediction markets, driven largely by an astronomical accounting adjustment rather than fundamental operational improvement.
The company holds a 14% stake in Anthropic, which was valued at $380 billion at the end of the first quarter. Anthropic's valuation has since surged to $965 billion, pushing Alphabet's stake to roughly $135 billion. Bank of America estimates this revaluation will generate about $80 billion in unrealized gains, driving its EPS forecast to $8.38. That figure is nearly triple the current Street consensus.
Market professionals should look right past this one-off windfall. A paper markup of this magnitude distorts the income statement and obscures the underlying commercial performance of the business.
Cloud capacity under scrutiny
The true driver of the stock will be Google Cloud. Last quarter, cloud revenue grew 63% year-over-year to $20 billion, but the division was constrained by supply. CFO Anat Ashkenazi admitted that "our cloud revenue would have been higher if we were able to meet the demand." Any acceleration from this base will signal that Alphabet's custom TPU infrastructure is finally catching up with AI demand.
Investors must also monitor the $462 billion cloud backlog, which nearly doubled quarter-over-quarter in the prior period. Management expects just over 50% of this backlog to convert to actual revenue within 24 months. Another significant leap in bookings would validate the long-term AI infrastructure spending thesis.
Capex and cash flow pressure
Funding this expansion is straining the balance sheet. Free cash flow fell 47% year-over-year last quarter, and capital expenditure for 2026 is climbing toward $190 billion. Anthropic is a major TPU customer, but the sheer scale of this spending requires rapid revenue conversion to justify the outlay.
Because the headline EPS number is virtually guaranteed to surprise, the market's reaction will hinge on cloud reacceleration and evidence of capex productivity. If the core business shows signs of slowing under the weight of its infrastructure costs, the Anthropic paper gains will offer little comfort.
