Google Q2 update: first negative free cash flow quarter ever even as cloud grew 82%
u/stockoscope ·
Reddit — r/ValueInvesting
· July 23, 2026 at 08:28
· ⬆ 18 pts
· 💬 25 comments
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Summary
The post updates a prior DCF analysis on Google (GOOGL) after Q2 earnings, highlighting first-ever negative free cash flow due to massive capex ($44.9B) exceeding operating cash flow ($39.1B).
Cloud revenue grew 82% to $24.8B with margins surging to 35.6%, offering evidence that capex is converting into profitable growth, but the overall valuation impact is mixed.
Author notes net income inflated by $98B in non-cash other income; underlying earnings grew ~30% but FCF went negative; they plan to rerun models after analyst revisions.
Quality assessment: Well-researched DD with data-driven updates from earnings, acknowledging both bullish and bearish signals; not speculative noise.
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Two weeks ago I posted a DCF here saying [GOOGL looked 30% overvalued on cash flow](https://www.reddit.com/r/ValueInvesting/comments/1upov82/google_looks_cheap_at_27x_earnings_but_a_dcf/). Just a quick update based on the Q2 report.
First some good news. Cloud revenue is up a whopping 82% to $24.8 billion, and cloud operating income tripled to $8.8 billion, taking the margin from 20.7% to 35.6%. Total operating income was up 30% to $40.8 billion. This is the first real evidence that capex is converting into something (as many of you mentioned in comments to the other post), and it matters for the valuation.
Now, something Google has never done before. Free cash flow came in at negative $5.9 billion. Capex hit $44.9 billion against $39.1 billion of operating cash flow, so it ate all the cash and then some. They've also stopped buying back stock completely and raised about 50 billion of equity and 20 billion of notes. They're now spending more cash than the business generates.
Also worth noting - net income was nearly 300% and eps came in at $9.11 but 98 billion of that sits in other income which is non cash. If we remove it, eps is goes down to $2.7.
So the underlying business grew earnings about 30%, and free cash flow still went negative.
How does it impact the valuation? It pulls both ways. Capex running above my estimate pulls fair value down, while cloud compounding at 82% on 35% margins pushes the growth line up. I'll rerun it once analysts reset their numbers.
Disclaimer: This is for educational purposes only and is not investment advice. The author and Stockoscope may hold positions in the securities mentioned. Always do your own research.
PS: hit a year of posting here this week. Your pushback has genuinely made the models better, so thank you.