Alphabet shares fall 3.5% as $205B capex plan overshadows cloud surge

Alphabet Inc. reported second-quarter revenue of $119.8B, beating estimates, as Google Cloud posted record growth of 82%, but shares fell more than 3.5% after the company raised its 2026 capital expenditure forecast to as much as $205B and reported its first-ever negative free cash flow.

"The increase in the range is primarily due to an acceleration in the delivery of capacity to meet growing demand," Chief Financial Officer Anat Ashkenazi said on the earnings call, adding that Alphabet remains "in a supply-constrained environment" with strong demand from both external cloud customers and across its own business.

Cloud revenue jumped to $24.8B in the quarter ended June 30, significantly exceeding analysts' expectations for roughly 64% growth, according to LSEG data. The segment's operating income surged 212% to $8.8B, while customer backlogs reached $514B, more than half of which management expects to recognize as revenue within 24 months. Adjusted earnings per share of $2.85 came in just below the consensus estimate of $2.89, according to Benzinga Pro. Overall revenue rose 24% from $96.4B in the same period last year.

The revised capex guidance of $195B to $205B for 2026 exceeded analysts' expectations of approximately $188B, according to Visible Alpha, and marked the second consecutive raise after the company guided $180B to $190B in April. Free cash flow swung to negative $5.9B from nearly $25B positive in the same period last year. Alphabet paused its share buyback program in the first half of 2026 and raised approximately $85B through equity offerings, including an investment from Berkshire Hathaway, to fund its AI infrastructure buildout.

The spending trajectory signals that Alphabet's AI investment cycle has shifted from internal cash generation to external financing, a transition that investors have begun penalizing. Bloomberg Intelligence analyst Mandeep Singh said the company could remain free cash flow negative for an extended period if capex continues rising. "Right now they are probably $10-$15 billion free cash flow for this year, next year if this goes to $300 billion there is no way they're going to be positive free cash flow," Singh said. Thomas Monteiro, senior analyst at Investing.com, said the new raise in capex "does not sit well" after a negative cash flow quarter. JPMorgan has projected Alphabet's 2027 capital spending could approach $400B as the company builds additional capacity for its Tensor Processing Units. Wolfe Research estimates Alphabet has accumulated more than $100B in TPU-related sales within its backlog, with most of that revenue expected to begin materializing from 2027 onward as capacity comes online. Despite the spending concerns, Mizuho maintained its Buy rating, saying the higher capex guidance had been largely anticipated and the cloud strength was being overlooked. Investors will watch the company's next earnings call for updated segment margins and any signs that AI infrastructure spending is translating into measurable returns on invested capital.

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