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Google’s profits look unsettling under the hood because net income has recently been lifted by large, volatile gains on investments, while Alphabet is spending heavily on AI infrastructure whose costs keep showing up over time. But the operating business is not collapsing: in FY2025, Alphabet’s revenue and operating income each grew 15%, and its operating margin held at 32%. The key is to separate recurring operations from investment gains—and to treat rising AI costs as a risk, not proof that profits are about to fall.
Why do Google’s profits look terrifying under the hood?
“Google” is the familiar name, but the financial reports are for Alphabet, which includes Google’s businesses and Other Bets. The distinction matters because headline net income combines operating results with items such as gains on investments. Those investment gains can make profit growth look much stronger—or weaker—than the underlying business trend.
In FY2025, Alphabet reported $132.2 billion in net income, up 32% year over year, against $129.0 billion in operating income, up 15%. The company reported $24.1 billion of net gains on equity securities for the year, primarily unrealized gains. They increased reported earnings but did not come from selling ads, providing cloud services, or other operating activity. An unrealized gain reflects a change in an investment’s value; it can reverse as market values change.
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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsThat gap is the first reason not to read a jump in net income as an equivalent jump in the strength of Google’s core business. Operating income is a more useful starting point for judging operations, though it still reflects expenses such as depreciation and legal accruals.
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How strong was Alphabet’s operating business in FY2025?
The full-year results give a substantial counterweight to the alarming interpretation. Alphabet’s FY2025 Form 10-K reported $402.8 billion in revenue, up 15%, and $129.0 billion in operating income, also up 15%. Operating margin remained 32%. Operating cash flow was $164.7 billion.
| FY2025 measure | Reported result | What it indicates |
|---|---|---|
| Revenue | $402.8 billion; up 15% year over year | Sales across Alphabet’s businesses continued to grow. |
| Operating income | $129.0 billion; up 15% | Profit from operations grew at the same rate as revenue. |
| Operating margin | 32%; unchanged from FY2024 | The company maintained its overall operating margin. |
| Net income | $132.2 billion; up 32% | Growth was boosted by non-operating investment gains, so it is not a clean measure of operating momentum. |
| Operating cash flow | $164.7 billion | Alphabet generated substantial cash from its business operations. |
These are Alphabet’s FY2025 figures from its 2025 Form 10-K, filed in 2026. They do not erase the spending and execution risks below; they show why “profits are collapsing” would be an inaccurate reading of the reported operating trend.
Why did Alphabet’s net income jump so much in Q2 2026?
The same distinction became especially important in the latest quarter covered here. Alphabet’s Q2 2026 earnings release, which labels the results unaudited, reported $119.8 billion in revenue, up 24% year over year; $40.8 billion in operating income, up 30%; and a 34% operating margin. Net income was $112.1 billion, but other income was $98.0 billion, primarily due to unrealized gains on equity securities.
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That investment gain is not revenue from Google’s products and services, nor is it an operating profit from the quarter. It was large enough to make the net-income figure a particularly poor stand-in for ordinary business performance. For the quarter’s operating trend, revenue, operating income, and margin are more informative; for the full picture, the investment gain still belongs in the reported results, but should be identified separately.
Is Google’s AI spending hurting profits?
Alphabet’s infrastructure investments create a real cost burden, but two different accounting effects should not be conflated. Capital expenditures are cash spent to acquire or build long-lived assets, such as data centers and equipment. Depreciation is the expense that recognizes the cost of those assets over time. Capex therefore does not hit operating income all at once, while depreciation from current and earlier investments can continue to raise operating expenses.
The investment and its later expense
Alphabet reported $91.4 billion in capital expenditures in FY2025. Depreciation rose from $15.3 billion in 2024 to $21.1 billion in 2025—nearly $6 billion, or 38%. On Alphabet’s Q4 2025 earnings call, CFO Anat Ashkenazi said: “Given the increase in our CapEx investments in recent years, we expect the growth rate in 2026 depreciation to accelerate in Q1, and meaningfully increase for the full year.” That is management’s outlook, not a reported full-year 2026 result.
The difference between cash investment and depreciation helps explain why heavy investment can pressure reported profit over several periods. It also means that capex should not simply be subtracted from operating income as though the two measures were the same. For perspective, FY2025 operating cash flow of $164.7 billion exceeded the reported $91.4 billion of capital expenditures, but the comparison alone does not establish what returns future projects will earn.
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Other costs are rising too
In FY2025, cost of revenue rose 11% to $162.5 billion, while operating expenses rose 22% to $111.3 billion. Alphabet attributed cost-of-revenue increases in part to traffic acquisition costs (TAC), YouTube content acquisition costs, depreciation, and technical infrastructure. Operating-expense increases reflected, among other things, compensation, legal matters, and depreciation. The company accrued a $3.5 billion European Commission fine in Q3 2025 and a $1.4 billion legal accrual in Q2; both contributed to higher general and administrative expense.
Infrastructure is not only an accounting charge. Alphabet says higher AI-related demand is expected to require more compute, and that infrastructure costs—including depreciation, energy, equipment, and network capacity—are expected to increase. The filings establish that costs and investment are rising; they do not establish that the spending will fail to produce revenue or that future profits must decline.
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What do the segments reveal about growth and cost?
Alphabet’s Q2 2026 segment results show why a single company-wide profit figure can conceal different business trends. Google Services remained much larger by revenue than Google Cloud. Cloud grew quickly and reported operating profit, while Other Bets and Alphabet-level activities reported losses. Alphabet describes shared AI research and development as the main activity behind Alphabet-level results.
| Q2 2026 segment or activity | Revenue | Operating result | How to read it |
|---|---|---|---|
| Google Services | $94.5 billion | Not stated in the figures cited here | The largest listed revenue stream in the quarter; includes Google’s services businesses. |
| Google Cloud | $24.8 billion; up 82% year over year | $8.8 billion operating income | Fast growth accompanied by reported operating profit. |
| Other Bets | Not stated in the figures cited here | $1.8 billion operating loss | A group of businesses outside the main Google Services and Cloud reporting segments. |
| Alphabet-level activities | Not stated in the figures cited here | $5.8 billion operating loss | Includes shared AI research and development, according to Alphabet’s description. |
Segment revenue and operating results are from Alphabet’s Q2 2026 earnings release; amounts are rounded from reported figures. The table does not imply that the central AI research loss is the full cost of AI: infrastructure and other costs can be recorded in operating segments as well.
What could make profits weaker from here?
Alphabet’s own disclosures identify pressures that could affect future growth or margins. They are risks and company expectations, not proof that a decline is imminent.
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- AI monetization: Alphabet says AI-powered features may be monetized differently from historical products. If user behavior or ad formats change, revenue growth and margins may not follow the pattern of older search products.
- Infrastructure costs: More compute, data-center capacity, equipment, energy, and depreciation can weigh on expenses as AI products expand.
- Competition and TAC: Competition and the mix of traffic acquisition costs can affect both revenue and the cost of distributing services.
- Legal and regulatory matters: Fines, legal accruals, and regulatory decisions can affect expenses and business operations. FY2025 included the cited European Commission and legal accruals.
- Investment volatility: Unrealized equity gains can lift net income in one period and shrink or reverse in another, making headline net-income growth less predictable than operating performance.
These risks are disclosed by Alphabet in its FY2025 Form 10-K. Their financial effect depends on future outcomes, including whether AI investment supports enough demand and revenue to justify the added costs.
Which figures should you watch?
To judge whether the underlying business is strengthening or weakening, separate operating performance from investment gains and track the spending burden over time.
- Revenue and its mix: Look across advertising, YouTube, subscriptions and devices, and Cloud. Growth in businesses with different margins can change the company-wide result.
- Operating income and margin: These show how much the businesses earn from operations before non-operating items such as equity-security gains.
- Cash generation versus capex: Operating cash flow and capital expenditures help show how much cash the business generates and how much it is investing. They are related but not interchangeable measures.
- Depreciation and infrastructure expense: Rising depreciation is the delayed income-statement effect of prior investment; energy and other running costs add to the current burden.
- Other income: Check whether net income growth is being driven by operating results or by volatile gains and losses outside operations.
- Central and segment costs: Consider Google Services, Google Cloud, Other Bets, and Alphabet-level activities separately so shared research and business-specific results are not confused.
The FY2025 operating figures show a growing business with a stable margin, while the investment gains make net-income growth look unusually strong. Q2 2026 reinforces the need to separate the two: operating growth remained strong, but an exceptional unrealized investment gain dominated net income. The concern under the hood is not evidence of an imminent collapse; it is that infrastructure spending, depreciation, monetization changes, and volatile investments make future returns and profit quality more consequential than the headline earnings number alone suggests.
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