Alphabet delivered another blockbuster quarter for its cloud business, but investors focused instead on the rising cost of the artificial intelligence race.
The Google parent reported record growth in its cloud division and topped Wall Street’s revenue expectations, yet shares fell more than 3.5% in premarket trading on Thursday after the company lifted its capital expenditure guidance for 2026 and reported negative free cash flow for the first time in its history.
Cloud growth powers revenue beat
Alphabet’s biggest highlight came from Google Cloud, which posted its strongest quarterly performance on record.
Cloud revenue jumped 82% year over year to $24.8 billion in the quarter ended June, significantly exceeding analysts’ expectations for roughly 64% growth, according to LSEG data.
The strong performance reflected robust enterprise demand for AI infrastructure and cloud computing services as companies continue deploying generative AI applications at scale.
Management also said cloud margins expanded during the quarter, while adoption of its Gemini AI models accelerated across enterprise customers.
Overall revenue exceeded Wall Street expectations, although adjusted earnings per share of $2.85 came in just below analysts’ consensus estimate of $2.89.
Despite the earnings miss, analysts generally viewed the operating performance as strong, with cloud continuing to emerge as Alphabet’s primary growth engine.
Investors focus on soaring AI spending
However, the positive cloud results were overshadowed by another sharp increase in Alphabet’s investment plans.
Chief Financial Officer Anat Ashkenazi told analysts that the company now expects to spend between $195 billion and $205 billion in capital expenditures during 2026, above the previous guidance of $180 billion to $190 billion.
The revised outlook also exceeded analysts’ expectations of approximately $188 billion, according to Visible Alpha.
“The increase in the range is primarily due to an acceleration in the delivery of capacity to meet growing demand,” Ashkenazi said during the earnings call.
She added that Alphabet remains committed to investing aggressively in infrastructure as long as returns remain attractive.
“We’re still in a supply-constrained environment,” she said. “I think we’ve said this now for multiple quarters in a row, and we are seeing very strong demand both from external cloud customers as well as across the business.”
The company attributed the higher spending to expanding data center capacity needed to support growing AI workloads and cloud demand.
Negative free cash flow spooks investors
The scale of Alphabet’s investments was also reflected in its cash generation.
The company reported negative free cash flow of $5.9 billion during the quarter, a sharp reversal from nearly $25 billion in free cash flow generated during the same period last year.
Ashkenazi acknowledged that cash generation is likely to remain under pressure.
“We expect the free cash flow will remain under pressure, driven by our investments in technical infrastructure, which enables us to capitalize on the AI opportunity and continue to drive attractive returns,” she said.
Bloomberg Intelligence analyst Mandeep Singh said the financial results were difficult to fault operationally but warned that the trajectory of capital spending could leave Alphabet generating negative free cash flow for an extended period.
“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 on a Bloomberg Podcasts episode.
He added that from this perspective, despite a 24% topline growth, for a company at their scale with negative free cash flow, investors would like to see stronger contributions from Search, YouTube and other businesses rather than relying primarily on cloud growth.
Thomas Monteiro, senior analyst at Investing.com, expressed similar concerns.
“After a negative cash flow quarter, the new raise in capex does not sit well for Alphabet,” he said.
“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.”
AI competition remains intense
While GOOG Cloud continues benefiting from the AI boom, Alphabet’s own AI products remain under close scrutiny.
The company delayed the launch of Gemini 3.5 Pro earlier this year, allowing rivals such as OpenAI and Anthropic to strengthen their positions in enterprise AI and coding assistants.
Chinese open-source AI models have also intensified competitive pressure.
During the earnings call, analysts repeatedly questioned Chief Executive Sundar Pichai about Google’s ability to maintain leadership in frontier AI development.
“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,” Pichai said.
He added that Alphabet has already begun training Gemini 4 and is directing significant computing resources toward the next-generation model.
Analysts remain optimistic
Despite investor concerns over spending, several brokerages maintained bullish views on the stock.
Mizuho said the higher capital expenditure guidance had been largely anticipated and argued the market reaction was surprising given the strength of the cloud business.
“As such, we are surprised the stock is trading off after hours and would expect it to recover in trading tomorrow,” the firm wrote, reiterating its Buy rating.
Wolfe Research also reaffirmed its Outperform rating with a $460 price target after increasing its own capital expenditure estimates.
The brokerage expects Alphabet’s AI infrastructure investments to continue expanding through 2027, forecasting capital expenditure could rise to around $330 billion as the company builds additional capacity for its Tensor Processing Units (TPUs).
Wolfe estimates Alphabet has already accumulated more than $100 billion in TPU-related sales within its backlog, with most of that revenue expected to begin materialising from 2027 onward as capacity comes online.
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