Alphabet posts record cloud growth but burns cash on $205B capex
Alphabet's cloud division delivered its strongest quarter ever, but a $15 billion increase to capital expenditure plans pushed the company into negative free cash flow, highlighting the immense financial cost of the artificial intelligence arms race.
Alphabet reported revenue of $119.8 billion for the quarter ended June, beating consensus estimates of $116.9 billion. The standout was Google Cloud, where revenue surged 82% to $24.8 billion, far exceeding the 64% growth analysts had expected.
However, the underlying financials revealed rising strain. Adjusted profit per share of $2.85 missed Wall Street's $2.89 target, and the company reported negative free cash flow of $5.9 billion. It is the first time in Alphabet's history it has burned cash in a quarter.
The cash drain stems directly from an aggressive infrastructure buildout. Chief financial officer Anat Ashkenazi told analysts that capital expenditure guidance for 2026 has increased by $15 billion, now ranging between $195 billion and $205 billion. "The demand still outpaces that investment," she said, noting faster-than-expected capacity delivery drove the revision.
This spending trajectory is testing investor patience. "After a negative cash flow quarter, the new raise in capex does not sit well for Alphabet," said Thomas Monteiro, senior analyst at Investing.com. "The market's most reliable cash generators are now spending more than they bring in. As long as revenue keeps accelerating, investors will tolerate it. But capital has a real cost again, and the room for error is shrinking every quarter."
The heavy spending is compounded by concerns that Alphabet's own AI products are lagging. The company delayed the launch of its Gemini 3.5 Pro model in June, losing ground in the AI coding tools market to rivals like Anthropic, OpenAI and Chinese open-source developers.
Chief executive Sundar Pichai acknowledged the competitive gap. "There are areas where we've acknowledged we need to improve; coding and agentic coding is an example of that," he said. Pichai stated the company is currently training its next-generation Gemini 4 model and remains "very committed and very confident of being at the frontier."
Alphabet's position as the third-largest cloud provider behind Amazon and Microsoft has made it a prime beneficiary of enterprise AI demand. The company also began recognizing revenue from direct sales of its TPU chips this quarter, though most of that income will arrive next year. Ashkenazi added that another significant capex increase is planned for 2027.
Big Tech is projected to spend over $1 trillion on AI infrastructure next year, according to Morgan Stanley. Alphabet shares have risen 9% this year but have fallen 9% since late April as investors weigh executive departures and model delays against its cloud momentum. Microsoft and Amazon report earnings next week.
