Alphabet Lifts AI Spending to $205 Billion as Cash Flow Turns Negative

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Alphabet expects to spend as much as $205 billion this year as it races to add data centers, chips and computing capacity for artificial intelligence, even after the investment push drove its quarterly free cash flow below zero for the first time.

The Google parent raised its 2026 capital-expenditure forecast to between $195 billion and $205 billion, up from its previous range of $180 billion to $190 billion, Chief Financial Officer Anat Ashkenazi said during an earnings call on Wednesday, July 22.

Alphabet spent $44.9 billion on capital projects during the second quarter, largely to expand AI and cloud infrastructure. The outlay left it with negative free cash flow of $5.9 billion, compared with the vast amounts of cash its Search and advertising businesses have traditionally generated.

The company’s shares fell about 3% in extended trading after it announced the higher spending forecast, despite reporting stronger-than-expected revenue and record growth at Google Cloud.

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

She said capacity had become available faster than expected, contributing to the latest increase in planned expenditure. Alphabet also expects capital spending to rise significantly again in 2027.

The scale of the investment illustrates how rapidly the economics of Big Tech are changing. Alphabet, Microsoft, Amazon, Meta and Oracle are pouring hundreds of billions of dollars into data centers, servers and advanced chips to train and operate AI models.

Alphabet’s spending is producing rapid growth in its cloud division, although investors are increasingly examining whether that expansion will justify the cash required to sustain it.

Google Cloud revenue surged 82% to $24.8 billion in the three months ended June 30, well above the 64% increase expected by analysts surveyed by LSEG. The growth accelerated from 63% in the previous quarter.

Operating income at the cloud business more than tripled to $8.8 billion from $2.8 billion a year earlier, as demand increased for AI infrastructure, enterprise software and Google Cloud Platform services.

Alphabet said nearly 90% of Fortune 100 companies were using Gemini Enterprise. Its first-party AI models were processing about 22 billion application programming interface tokens a minute, while the Gemini app had reached 950 million monthly active users.

The company also began recognizing revenue from direct sales of its tensor processing units (TPUs) during the quarter. The custom AI chips compete with Nvidia’s graphics processors, although Alphabet said most of the revenue from recently signed agreements would be recorded next year.

Chief Executive Sundar Pichai said Alphabet’s AI investments were reshaping its businesses, from cloud computing and advertising to Search and consumer applications.

The company has, however, faced questions about delays to Gemini 3.5 Pro, its next flagship AI model, which had initially been expected in June.

Pichai acknowledged that Google needed to improve in areas including coding and autonomous coding tools, where rivals such as OpenAI and Anthropic have made gains. He said Alphabet was continuing to test Gemini 3.5 Pro while also training Gemini 4.

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

Alphabet’s total revenue rose 24% to $119.8 billion, exceeding the $116.9 billion average analyst estimate compiled by LSEG.

Advertising revenue increased to $81.6 billion, slightly above expectations. Search and related advertising revenue rose 17% to $63.3 billion, while YouTube advertising revenue increased 13% to $11.1 billion.

Adjusted earnings of $2.85 a share were slightly below analysts’ estimate of $2.89.

Reported net income available to common shareholders climbed to $112.1 billion from $28.2 billion, but the increase did not principally reflect the performance of Alphabet’s operating businesses.

The company recorded about $98 billion in other income, largely from unrealized gains on equity investments. That accounting boost made the surge in reported profit a less useful measure of the underlying quarter than revenue, operating income and cash flow.