Alphabet Stock Slipped After Q2 Earnings. Here's What Investors Need to See in Q3.

Wall Street can be a little impatient with the massive amounts of money that technology companies are spending on artificial intelligence. Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) got a taste of that impatience when it reported its second-quarter earnings in July.

The Google parent delivered impressive results, including a whopping 82% increase in Google Cloud revenue. But investors weren't entirely satisfied, particularly after Alphabet raised its capital expenditure (capex) guidance again. Shares fell roughly 6% following the report.

I believe that Wall Street is in the "show-me" phase of AI spending. Investors aren't simply rewarding companies for announcing ambitious AI projects anymore. They want tangible evidence that those investments are generating meaningful returns.

Alphabet fell short of that bar in Q2. Still, it will get another opportunity to make its case when it reports third-quarter earnings on Oct. 28. And two businesses deserve particular attention -- Google Cloud and the company's growing AI chip operation.

Alphabet's AI spending comes with a hefty price tag

Alphabet certainly isn't having trouble growing its business. Second-quarter revenue increased 24% year over year to $119.8 billion, while operating income climbed 30% to $40.8 billion.

Google Cloud was particularly impressive, generating $24.8 billion in revenue, up from $13.6 billion a year earlier. Cloud operating income also more than tripled to $8.8 billion.

Those are solid results, but they came as Alphabet spent $44.9 billion on capital expenditures during the quarter, roughly double its spending a year earlier. Management also increased its full-year capex forecast by $15 billion to between $195 billion and $205 billion.

That's a staggering amount of money, even for a company with Alphabet's financial resources. And the spending is putting pressure on cash flow.

Alphabet reported negative free cash flow of $5.9 billion in the second quarter, despite generating substantial cash from its operations. That's the problem investors are watching -- the company is growing rapidly, but building the infrastructure to support that growth is becoming increasingly expensive.

Google Cloud needs to deliver more

One of the strongest arguments supporting Alphabet's AI investments is Google Cloud's performance. The business has accelerated considerably during 2026. Cloud revenue increased 63% year over year in the first quarter before jumping 82% in Q2.

That's particularly encouraging because Google Cloud is one of the clearest avenues for Alphabet to convert demand for AI computing into revenue.

But in terms of revenue, Google Cloud lags far behind Amazon Web Services. AWS generated $42.23 billion in net sales in the second quarter. And the company's AI and chips businesses both exceeded $25 billion in run rate.

Those are the kinds of numbers that helped Amazon's stock jump following its Q2 report, even though Amazon also increased its capex guidance.

Google's AI chips should become another growth engine

There's another part of Alphabet's AI strategy that deserves more attention -- its custom-designed Tensor Processing Units (TPUs). These chips were originally developed to handle Google's own computing requirements. But Alphabet is increasingly turning them into a commercial business, offering customers an alternative to the graphics processing units (GPUs) that dominate AI computing.

Google began recognizing revenue from direct TPU chip sales during the second quarter, adding another potential source of income beyond renting computing capacity through Google Cloud. We've already seen how Amazon's chips business is a win for Amazon stock; Google could replicate that result if it starts reporting TPU revenue.

Alphabet doesn't separately report TPU revenue in its financial statements. That makes management's commentary on customer demand, chip sales, and the contribution of its custom processors especially important.

Investors should be listening for evidence that the business is becoming a meaningful commercial opportunity rather than simply another expensive technology project.

Can Alphabet satisfy Wall Street?

Alphabet has plenty working in its favor. Its advertising business continues to generate enormous revenue, Google Cloud is growing rapidly, and its custom AI chips could provide another revenue stream with strong expansion potential.

Alphabet doesn't necessarily need to announce another capex spending increase or unveil a new AI initiative to get Wall Street's attention. It needs to demonstrate that Google Cloud can sustain its momentum, that its chip business is attracting customers, and that the enormous infrastructure investments are producing attractive returns.

Alphabet is a great company, and it uses AI well. Now it needs to show Wall Street how it's monetizing that investment.

Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.