Alphabet's AI spend sinks cash flow, but Cloud jumps 82%

Alphabet's stock chart tells one story and its income statement tells another. The shares closed lower in each of May, June, July and August — the longest monthly losing streak since 2015 — and sit about 18% below the 52-week high of $408.61 set in mid-May. Yet the second-quarter report showed revenue growth accelerating to 24% and operating margin widening to 34%, with Google Cloud revenue up 82% and its operating income roughly tripling to $8.8 billion.

The tension is cash. Capital expenditures doubled year over year to $44.9 billion in the quarter, pushing free cash flow to negative $5.9 billion. Management raised its full-year capital spending guidance to $195 billion to $205 billion, from $180 billion to $190 billion, and said it expects capital expenditures to rise significantly in 2027. To fund this, Alphabet sold $49.6 billion of new stock in June, including preferred shares with a 6.25% dividend, and ended June with $98.2 billion of long-term debt — more than double where it started the year. It also spent about $28 billion buying back stock in the first half of 2025 but none in the first half of 2026.

The investment case appears to hinge on whether Cloud's improving profitability — turning about 36% of revenue into operating income, up from about 21% — keeps pace with the spending. Reported earnings look cheap at a price-to-earnings ratio of about 17, but that figure is flattered by unrealized investment gains, including a $99 billion gain on equity securities that added $6.26 to second-quarter earnings per share. On expected next-year earnings, the forward ratio is about 22, down from about 27 at the May high. The author's view is that this is a reasonable price, but he notes he would reconsider if Cloud growth cools sharply while spending keeps climbing.