Deutsche Bank: Google Cloud Revenue Significantly Underestimated, Earnings Focus on Cloud Demand
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Deutsche Bank raised its Q2 Google Cloud revenue growth forecast to 70% and projects 2027 cloud revenue at $190–195 billion — nearly $50 billion above the Street's $142 billion consensus, suggesting the market is drastically underpricing Alphabet's cloud trajectory.
What exactly is the market missing?
Deutsche Bank's core thesis: the market is fixated on capital-expenditure pressure and overlooking how fast Google Cloud revenue is converting. This means → investors are watching the spending line but ignoring the payback pace.
DB forecasts 2027 Google Cloud revenue at $190–195 billion; consensus sits at just $142 billion — a gap of nearly $50 billion.
At a 30% margin, that extra revenue alone would add roughly $15 billion in operating profit — about $1 per share in incremental earnings. In plain terms = the cloud revenue the Street hasn't modeled could lift EPS by a full dollar.
What justifies a 70% growth forecast?
AI compute demand remains supply-constrained — Google recently leased part of SpaceX's compute capacity to fill the gap.
As of Q1-end, Google Cloud's backlog reached $462 billion, up 400% year-on-year. This means → customers have already placed orders; revenue recognition is largely a matter of delivery schedule.
Several hyperscalers, including Amazon, have begun raising prices on select cloud services — a signal that pricing power is shifting toward sellers across the industry.
With capex this high, where does the money come from?
DB projects 2027 Alphabet capex at roughly $325 billion (up from a prior $250 billion estimate), rising to $365–370 billion in 2028.
Financing capacity is keeping pace: this quarter alone, Alphabet completed an estimated $65–70 billion in financing — including a $10 billion investment from Berkshire Hathaway, two equity raises totaling about $36 billion, an ATM facility of up to $40 billion, and multi-currency senior debt issuance.
As of Q1-end the company held roughly $127 billion in cash and investments; DB estimates cumulative operating cash flow of about $420 billion through 2027. In plain terms = spending is accelerating, but so are earnings and fundraising — the cash buffer is more than sufficient.
Could build costs come in lower than feared?
DB's capex math: roughly 11.5 GW of existing compute demand plus an estimated 10 GW of new capacity in 2027, at $30–35 billion per GW in construction cost.
Google uses a hybrid deployment of TPUs — its in-house AI chips — and Nvidia GPUs. This means → it is not fully reliant on the most expensive Nvidia hardware, so unit build costs may run below what the market fears.
Will Search and Gemini be a drag?
DB's channel checks show advertisers increasingly directing budgets toward AI Overview while also spending more on Google Search and ChatGPT-related AI ad placements.
SimilarWeb data shows Google's Q2 site visits and page views improved versus Q1. DB maintains its forecast of 16.5% constant-currency year-on-year Search revenue growth for Q2.
The delayed Gemini model release is a short-term event — Sensor Tower data shows Gemini App session volumes still growing. This reflects that a shift in model-release timing does not alter Alphabet's long-term AI competitiveness.
What should investors actually watch in this earnings report?
DB is explicit: the key is not whether capex keeps climbing.
What truly determines the valuation is how management frames three things: cloud demand trajectory, backlog trends, and the pace of future revenue conversion.
This means → if management confirms strong cloud demand and continued backlog growth on the earnings call, the market may reprice Alphabet's valuation framework for the AI investment cycle.
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