Alphabet (GOOGL) has spent billions of dollars preparing for a future that could disrupt its most profitable business.
Generative AI helps people get thorough answers without the need to navigate through a standard list of search results. This raised a thorny question for Alphabet investors: Would Google’s own AI technologies replace the searches that drive its advertising business?
Now Google says the opposite is happening.
Google and Alphabet CEO Sundar Pichai noted that AI Overviews and AI Mode are prompting consumers to perform extra searches. AI Mode has more than a billion monthly active users, and Google believes the function is driving an incremental increase in overall searches. Its AI-powered Search capabilities are also sending billions of hits to websites every week.
There is some truth in the company’s argument, as the numbers show.
Advertising revenue from Google Search and other sources grew 17% from a year earlier to $63.3 billion in the second quarter. Paid clicks were up 13% and average cost per click was up 3%.
That’s a significant early signal for stockholders. AI may be growing Google’s search business, not cannibalizing it right away.
The bigger concern is whether Alphabet can generate enough profit from that incremental consumption to cover its fast-rising infrastructure expenditures.
“Our popular AI features are driving Search query growth,” Pichai said in Alphabet’s second-quarter earnings statement.
Alphabet’s AI features are strengthening its core business
Alphabet posted $119.8 billion in sales for the second quarter, up 24% from a year earlier. Search, subscriptions, and YouTube advertising helped boost Google Services revenue 15% to $94.5 billion.
Search is still the backbone of the investment argument for Alphabet.
The business generates ad revenue on a scale that newer AI competitors cannot match. Operating income for Google Services in the quarter was $39.5 billion, a 20% increase, and an operating margin of 41.8%.
AI Mode might open up the option for people who would not have considered those queries to be searches, pushing them to ask longer, more complex questions.
Queries in AI Mode have more than doubled every quarter since the functionality began, Google claimed. Internal business data reveals that searches connected to planning have surged 80% faster than general AI Mode queries in the past six months.
Key numbers for Alphabet investors
- $63.3 billion: Quarterly Google Search and other advertising revenue.
- 17%: Search advertising growth from a year earlier.
- 13%: Increase in paid Search clicks.
- One billion: Monthly active AI Mode users.
- 41.8%: Google Services operating margin.
- $119.8 billion: Alphabet’s total quarterly revenue.
Additional queries can create more opportunity to show economically relevant responses and advertising.
Already, Google is exploring conversational ads, sponsored product recommendations, and checkout in its AI Search experiences. The formats are meant to help advertisers contact customers while they compare products and make decisions, the business said.
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Google is also working to alleviate publishers’ fears that AI-generated summaries could drive down visits to outside sites.
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The company has introduced more direct links, article previews and recommendations for original sources to AI Mode and AI Overviews. Google says its AI Search capabilities now generate billions of visitors to websites each week, but it hasn’t said how that traffic compares with regular Search referrals.
Anna Moneymaker / Getty Images
Alphabet’s Search win comes with a costly second test
Rising queries and advertising income reflect only one side of the AI investment debate.
Alphabet spent $44.9 billion in capital expenditures in the second quarter, most of it on servers, data centers and networking equipment. That spending led to a quarterly free cash flow deficit of $5.9 billion.
Management lifted its full-year capital expenditure guidance to $195 billion-$205 billion from $180 billion-$190 billion. Alphabet also anticipates another jump in infrastructure investment in 2027.
Those metrics are the main danger for Alphabet stock.
AI Search may be driving usage higher, but additional queries are only useful when the money they generate is more than the cost of generating answers, constructing infrastructure and running data centers.
Google said technical and hardware improvements pushed the cost of an AI Mode response to its lowest point since launch in the quarter. That’s positive, but the business didn’t divulge the cost per inquiry or compare the profitability of AI Search directly to conventional Search.
Alphabet is making advertising revenues, and there is plenty of room to invest. Operating cash flow was $39.1 billion for the quarter and cash, cash equivalents and marketable securities were $242.5 billion at quarter-end June.
Shareholders are also getting a quarterly dividend of 22 cents a share. As of the end of the first half of 2026, Alphabet had $69.5 billion left on its stock-repurchase authorization, but repurchased no common shares.
The optimistic argument is getting clearer: Google can increase AI to Search without killing query growth or ad income.
The bearish case has moved. Investors will have to decide if being on top means even higher expenditure and lower free cash flow instead of worrying about people leaving Google.
For now, Alphabet has passed this initial test. AI Search looks to be making MORE searches, not less.
The next test is to show that every additional AI inquiry can be as financially beneficial as the searches on which Google established its business.
Related: Alphabet cloud surge overshadowed by negative cash flow shock
