Google LLC reported a slowdown in advertising sales growth in the second quarter, triggering an after-hours selloff of its shares of about 1.5%.

Parent Alphabet Inc. said Google generated $64.6 billion in ad sales in the quarter, up 11.1% from $58.14 billion in the same period last year. That was slightly ahead of analysts’ expectations but less than the 13% growth reported in the previous quarter.

Executives said fears that generative artificial intelligence competitors would detract from search performance and advertising revenues have so far been unfounded. “We are seeing increases in search usage and user satisfaction,” said Alphabet Chief Executive Sundar Pichai (pictured).

Adding AI-generated responses to the top of search results pages has been particularly popular, he said: “We are seeing engagement from younger users ages 18 to 24 when they use AI with searches.”

Overall, the company beat estimates on most fronts. Revenue of $84.74 billion exceeded analysts’ forecasts of $84.19 billion, but the 12% year-over-year growth was below the 15% reported last quarter. Net income of $23.62 billion was up 28.6% from the same period last year and an indication that belt-tightening measures initiated 18 months ago are showing results. Earnings per share of $1.89 beat estimates of $1.84.

Growth was particularly strong in the United States, up 17% overall. That compared with 11% growth in the Europe/Middle East/Africa region and 9% in Asia/Pacific.

Cloud milestone

Google’s closely watched cloud operation reported $10.35 billion in revenues, up 29% from $8 billion in the same quarter a year ago. It was the first time the cloud business had passed $10 billion in quarterly revenue and $1 billion in operating profit.

Reaching that milestone “shows that the organization is standing on its own two feet within Alphabet,” said Forrester Research Inc. Principal Analyst Lee Sustar. Though Google Cloud’s operating profit is only a fraction of that of rivals Amazon Web Services Inc. and Microsoft Corp., “Google’s AI offerings have apparently helped it expand its footprint with existing customers and position itself to win new accounts.” Sustar said. “It’s another indicator of how AI has brought new dynamism to the enterprise public cloud market.”

Dynamism comes at a cost. Alphabet said it spent $13.2 billion on capital investments in the quarter, up 91% year-over-year, driven by investments in data centers and infrastructure to run AI workloads. Spending of $2.2 billion to build AI models across Google’s DeepMind and Research organizations doubled from $1.1 billion in last year’s second quarter.

On a conference call with analysts, Pichai defended the aggressive spending. “The risk of underinvesting is significantly greater than the risk of overinvesting,” he said. “Not investing to be at the front has a much more significant downside.”

Revenue to come

Thomas Monteiro, senior analyst at Investing.com, said he’s confident the strategy will pay off. “Alphabet should get a significant boost in revenues across the board as the already ongoing AI push reaches a more mature level,” he said.

YouTube advertising revenue came in at $8.66 billion, slightly under the $8.93 billion analysts had expected and up 13% from a year ago. Executives said the amount of time the average user spends watching YouTube continues to grow and the company is closing in on monetizing the short video content that has been under pressure from competitors such as TikTok.

YouTube has been the No. 1 most-watched streaming platform on televisions in the U.S. for 17 straight months, said outgoing Chief Financial Officer and current President and Chief Investment Officer Ruth Porat. “We continue to have significant growth in the subscriptions business, which drives the majority of revenue growth in this line,” she said.

Fiscal restraint

Alphabet said it continues to make progress on streamlining its business, following last year’s announcement that it intended to reduce its global workforce by about 6%. Headcount in the second quarter fell from a year ago as the company focuses more aggressively on its bottom line. “We will continue to deliver operating margin expansion relative to 2023,” Porat said.

The company also said it would invest an additional $5 billion into Waymo, its self-driving car venture, over the next several years.

Despite the slowdown, Investing.com’s Monteiro said he’s bullish on Google’s advertising business in the longer term. “Businesses that didn’t do particularly well this quarter are very likely to pick up a good pace over the next year,” he said. “This is partly due to the expected solid rebound in ad growth as capital costs grow cheaper and smaller companies find themselves with a bit more cash to spare.”

Mizuho Americas LLC analyst James Lee was similarly optimistic, writing that Google’s AI and Pixel Day on August 13 will give the search giant a chance  “to potentially showcase its [large language model] and AI agent running locally on Android, which could differentiate Alphabet from its peers and address the debate of increased competition in search.” Mizuho raised its fiscal 2026 earnings before interest, taxes, depreciation and amortization estimate for Alphabet 3% to $188 billion.

Executives declined to discuss reports that efforts to negotiate a $23 billion acquisition of cybersecurity startup Wiz Inc. had fallen apart. Porat earlier told The Wall Street Journal that Google had strong opportunities to organically grow the cloud business but was “always looking for good opportunities to diversify the portfolio.”

Photo: Google/livestream