• Alphabet beat Q2 expectations, but investors were uneasy over a surprise $10 billion capex increase.
• It's the latest sign that the race to stay ahead on AI is getting eye-wateringly expensive.
• But Google's stock quickly recovered as its CEO touted big growth numbers for its AI features.

Google's parent company Alphabet beat analyst estimates for its second-quarter earnings on Wednesday, but its stock initially faltered after Alphabet reported it would increase its capital expenditures by $10 billion this year.

Investors have been closely monitoring Alphabet for signs of weakness as more and more people turn to ChatGPT instead of Google to find answers on the internet.

The tech giant saw strong growth in its core search business, which was up over 11% year-over-year, fueled in part by the strong performance of its AI overviews, CEO Sundar Pichai said in a statement.

Alphabet also reported strong growth for Google Cloud, which recently signed on OpenAI as a customer and grew by a third to over $13 billion in revenue for Q2.

"We had a standout quarter, with robust growth across the company," Pichai said. "We are leading at the frontier of AI and shipping at an incredible pace."

Despite the strong performance, investors were initially spooked over Google's announcement that it would boost capital expenditures by $10 billion this year — bringing its total to a staggering $85 billion.

Most of those massive expenditures are for keeping Google at the leading edge of an increasingly competitive AI race.

Meta recently upped the stakes with the announcement of a new "superintelligence labs" division and an aggressive hiring spree, reportedly making offers of $100 million or more to top AI researchers.

Alphabet shares were trading down around 2.5% immediately after the earnings release was published on Thursday afternoon.

However, they quickly regained lost ground and were up about 2% during after-hours trading at the time of this writing.

The stock bump happened as Alphabet shared more about its latest user numbers for its AI features, showing strong momentum.

For example, Pichai revealed that AI Overviews — the feature which summarizes Google Search results — now has 2 billion users, up from 1.5 billion in May.

The app for Google's answer to ChatGPT, Gemini, now has 450 million monthly active users, Pichai also said. Plus, a new Search function called AI Mode, which just launched this summer, has 100 million users in the US and India.

During the earnings call, Pichai said that the $10 billion capex increase was due, in part, to a lack of chips for training and running Google's latest AI models.

Those are especially critical for Google Cloud, which is growing fast and provides AI services to users like its rival AWS.

"It's a tight supply environment, and we are investing more to expand," Pichai said.

Pichai shrugged off the AI talent wars raging across Silicon Valley.

"Through this moment, we continue to look at both our retention metrics — as well as the new talent coming in — and both are healthy," he said. "I do know individual cases can make headlines, but when we look at numbers deeply, I think we are doing well through this moment."

Here are the key numbers for Alphabet's second quarter, compared to analysts' estimates compiled by Bloomberg and LSEG:

Earnings per share: $2.31 vs. $2.17 expected

Revenue: $96.42 billion vs. $93.94 billion expected

Google advertising revenue: $71.34 billion vs. $69.69 billion expected

YouTube advertising revenue: $9.79 billion vs. $9.56 billion expected

Search revenue: $54.19 billion vs. $52.85 billion expected