Alphabet and Meta are set to open Monday with Alphabet appearing to hold a valuation edge, but that advantage is largely an illusion. Pre-market trading showed GOOG at $339.59, up 1.2%, while GOOGL climbed 1.5% to $343.70. Meta, meanwhile, gained 1.8% to $659.57. These early indications, however, mask a more significant distortion stemming from Alphabet's latest earnings report.
The Billion Question
Alphabet's second-quarter GAAP net income was boosted by a staggering $99.03 billion in gains on equity securities, primarily unrealized gains from investments in SpaceX and another private company. This windfall pushed net income to $112.11 billion and diluted EPS to $9.11. A simple price-to-earnings calculation that treats this one-time gain as recurring makes Alphabet's stock appear far cheaper than its underlying business warrants.
Operating Performance: A Cleaner Comparison
When stripping out the investment gain, Alphabet's core operations remain robust. Revenue surged 24% year-over-year to $119.80 billion, while operating income grew 30% to $40.77 billion. The operating margin expanded to 34% from 32%, according to the company's Form 10-Q. These figures offer a more accurate starting point for valuation than headline EPS.
Meta, on the other hand, grew revenue faster at 28% to $60.80 billion, but its operating income fell 8% to $18.78 billion, with margins contracting sharply to 31% from 43%. The company attributed the decline to higher employee compensation, severance costs, infrastructure spending, legal expenses, and the cost of serving AI tokens. This divergence highlights a key difference: Alphabet is converting revenue growth into profit more efficiently, while Meta is investing heavily in AI infrastructure, which is currently pressuring margins.
Cloud: Alphabet's Second Engine
Alphabet's Google Cloud segment is emerging as a formidable profit center. Revenue reached $24.77 billion, an 82% increase year-over-year, and operating income more than tripled to $8.81 billion, achieving a 35.6% segment margin. In contrast, Meta remains heavily reliant on advertising, which generated $59.36 billion, or 97.6% of its quarterly revenue. While Meta's advertising scale is a strength, Alphabet's diversified cloud business offers a more developed second profit pool.
Capital Spending and AI Investments
Both companies are pouring capital into AI. Alphabet's capital expenditures hit $44.9 billion in the quarter, representing 37.5% of revenue, and it raised $49.6 billion through stock and convertible preferred offerings to fund AI infrastructure. This financing introduces potential dilution but provides ample room for growth. Meta's capex was $31.08 billion, a heavier 51.1% of revenue, and management has guided to $130-$145 billion in capital spending for 2026. Meta also reported $349.31 billion in non-cancellable commitments for cloud capacity and data centers.
What to Watch Next
For Alphabet, the key metrics are Cloud revenue and margin sustainability, especially with the new TPU system sales. For Meta, operating margin recovery and the pace of capital commitments will be critical. Investors should focus on these operating lines rather than Alphabet's inflated GAAP EPS to make informed comparisons. The $99 billion gain is a one-time event that obscures the true valuation picture.
