Alphabet stock tumbles 7% on AI capex surge forecast

Alphabet finds itself at a critical juncture common to hyperscalers (large cloud providers) investing heavily in AI infrastructure. The company's core AI businesses are performing exceptionally: Google Search's record $63.3 billion in revenue reflects the success of AI-powered features like AI Overviews and AI Mode in increasing user engagement and advertising exposure, while Google Cloud's 82% revenue surge to $24.8 billion demonstrates robust demand for AI computing services. The $514 billion order backlog—and its $50 billion quarterly increase—underscores that enterprise customers are competing fiercely for data center capacity to build and deploy AI applications.

However, the accounting reality complicates the picture. Alphabet's Q2 earnings surged 294% year-over-year to $9.11 per share, but $98 billion of that came from gains on investments in companies like Anthropic and Space Exploration Technologies, not from core operations. Excluding those gains and accounting for the massive capex, Alphabet generated negative free cash flow of $5.8 billion in Q2. The company's raised capex guidance—now $195–$205 billion for 2026, compared with $91 billion last year—will be depreciated gradually, meaning profit margins will be compressed for years even if demand holds steady. The risk is real: if AI computing capacity becomes oversupplied or enterprise demand falters, those investments will have little to show for the earnings damage they inflict.