Google burns cash for first time as AI spending pushes 2026 capex to $205 billion

Google parent Alphabet has reported negative free cash flow for the first time since going public, underscoring the growing financial cost of the artificial intelligence arms race as the search giant sharply raises its spending plans on data centres, chips and other AI infrastructure.

Alphabet said free cash flow for the quarter ended June 30 stood at -$5.9 billion, as capital expenditure surged and the company accelerated investments to meet rising demand for AI computing capacity.

The company also raised its 2026 capital expenditure forecast to $195 billion-$205 billion, up from its earlier guidance of $180 billion-$190 billion. This marks the second increase to Alphabet’s capex forecast this year.

Shares of Alphabet fell around 3.5 per cent in after-hours trading following the results.

“We expect that free cash flow will remain under pressure driven by our investments in technical infrastructure, which enable us to capitalise on the AI opportunity and continue to drive attractive returns,” Alphabet Chief Financial Officer Anat Ashkenazi told analysts.

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The latest spending increase highlights the scale of the transformation underway at Google. For years, the company’s advertising-led business generated enormous cash flows with relatively limited capital requirements. But the AI boom has forced Alphabet to invest heavily in data centres, advanced chips and computing infrastructure.

The company is now competing with Meta, Microsoft and Amazon to secure the computing capacity required to develop and deploy increasingly powerful AI models. The four technology giants are expected to spend more than $725 billion combined on AI infrastructure in 2026.

Google’s AI spending weighs on cash flow

Alphabet’s capital expenditure rose to $44.9 billion in the second quarter. The sharp increase was enough to push free cash flow into negative territory.

Free cash flow is closely watched by investors as it shows how much cash a company has left after covering operating costs and capital expenditure. It is used to fund debt repayments, acquisitions, dividends and share buybacks.

“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,” he added.

Alphabet had previously been seen as one of the companies best positioned to withstand the AI spending boom. Its massive search advertising business was expected to provide sufficient cash to fund its AI ambitions.

However, the latest results have raised questions about how much capital the company will need to deploy to remain competitive.

“Markets want to see hyperscalers pushing hard to secure AI leadership but not at a pace that eviscerates earnings,” said Dec Mullarkey, managing director at asset management firm SLC Management.

Google Cloud posts record growth

Alphabet’s aggressive AI investments are also beginning to generate significant returns, particularly through its cloud business.

Revenue from Google Cloud rose 82 per cent year-on-year to $24.8 billion in the second quarter. The growth was significantly ahead of analysts’ expectations of around 64 per cent.

The cloud division has benefited from companies racing to secure computing capacity for training and running AI models. Google Cloud has also secured major contracts with AI companies, including Anthropic.

The company’s cloud backlog rose to $514 billion at the end of the quarter, up from around $460 billion in the previous quarter.

Google also began recognising revenue from direct sales of its own Tensor Processing Unit chips, or TPUs, during the quarter. The chips compete with Nvidia’s graphics processing units, which dominate the market for AI computing.

Ashkenazi said the majority of revenue from the company’s TPU business agreements would come through next year.

Search advertising remains the core engine

Alphabet’s core search business also continued to grow, although its performance was slightly below some analyst expectations.

Search advertising revenue rose 17 per cent to $63.3 billion, while total advertising revenue stood at $81.6 billion.

Alphabet’s total revenue rose to $119.8 billion, from $96.4 billion a year earlier. The figure beat analysts’ average estimate of $116.9 billion.

Adjusted earnings per share came in at $2.85, slightly below Wall Street expectations of $2.89.

Operating income rose 30 per cent to $40.8 billion, while the operating margin expanded to 34 per cent.

Net income surged to $112 billion, helped by gains on Alphabet’s investments, including its stake in SpaceX.

Gemini delays raise questions about Google’s AI strategy

Despite the strong cloud performance, investors remain concerned about Alphabet’s position in the race to develop frontier AI models.

The company delayed the launch of its next flagship model, Gemini 3.5 Pro, which had initially been expected in June. The delay has raised concerns that Google is losing ground to rivals such as OpenAI and Anthropic, particularly in AI coding and autonomous AI agents.

Chinese open-source AI models have also continued to gain traction.

Several analysts questioned Chief Executive Officer Sundar Pichai during the earnings call about whether Google could keep pace with competitors at the cutting edge of AI development.

Pichai acknowledged that the company had areas where it needed to improve.

“There are many attributes on which we are still at the frontier. There are areas where we've acknowledged we need to improve; coding and agentic coding is an example of that,” he said.

Pichai said Google was continuing to test Gemini 3.5 Pro but had already begun training its next-generation model, Gemini 4.

“We are both very committed and very confident of being at the frontier for the next generation,” he said.

Pichai also described the current AI transformation as being in its early stages.

“It feels like we are in very early innings of what feels like a secular shift across multiple areas,” he said, adding that Google had become “more bullish on the opportunities ahead” over the past year.

Alphabet turns to debt and equity to fund AI expansion

The scale of Alphabet’s AI spending has also changed its financial strategy.

The company has taken on nearly $100 billion in debt and in June moved to raise around $85 billion in its first share sale in more than two decades.

That marks a sharp reversal for a company that spent years returning cash to shareholders through share buybacks.

Ashkenazi said Alphabet was using operating cash flow, debt and equity to finance its infrastructure expansion.

She also said the company had no intention of selling additional shares beyond what has already been announced.

“We also want to make sure we have a resilient balance sheet and a strong balance sheet,” she said.

The spending is being driven partly by demand from customers seeking access to AI computing infrastructure. Alphabet said demand for its cloud capacity continued to outpace its investments.

“We have increased our capacity quite significantly over the past three years. The demand still outpaces that investment,” Ashkenazi said.

She added that faster-than-expected delivery of additional capacity had also contributed to the increase in the spending forecast.

Alphabet has also warned that capital expenditure will rise significantly again in 2027.

The company’s strategy is built around a “full-stack” approach that combines its own AI chips, data centres, frontier models and consumer products.

The challenge for Alphabet is to ensure that the huge investments required to compete in AI translate into sustained growth in cloud, advertising and new AI services.

For now, the company’s revenue growth remains strong. But the shift to negative free cash flow shows that the cost of maintaining its position in the AI race is becoming increasingly visible on its balance sheet.

With inputs from agencies.