The Google parent posted the fastest cloud growth in its history and its first-ever negative free cash flow in the same quarter. With three more megacaps reporting next week, investors are asking whether AI revenue can outrun the spending.
Alphabet turned in the fastest cloud growth of its life and the first cash burn it has ever recorded, in the same three months. The combination has unsettled investors heading into a run of Big Tech earnings that could confirm the AI buildout now costs more than the industry's richest companies can generate on their own.
The Google parent reported Wednesday that it burned $5.9 billion in free cash flow in the second quarter, the first negative figure since it went public. The shortfall came even as Google Cloud, the division that rents out AI computing power, grew 82% to $24.8 billion. Alphabet also lifted its 2026 capital spending plan by $15 billion to a range of $195 billion to $205 billion, and told analysts that 2027 spending would climb again.
Once prized for fat margins and the kind of cash flow that could bankroll new bets without breaking a sweat, the company is now leaning on debt and share sales to fund its AI infrastructure. The pain is expected to widen from here.
The quarter that spooked investors
On paper the top line looked strong. Revenue rose 24% to $119.8 billion, beating the $116.93 billion analysts had expected. Operating income climbed 30% to $40.8 billion, lifting the operating margin to 34%.
The problems sat underneath. Adjusted earnings of $2.85 per share fell short of the $2.89 Wall Street wanted. Capital expenditure more than doubled to $44.9 billion for the quarter, and that is what pushed free cash flow below zero.
One figure deserves a second look, because it flatters the quarter. Net income came in at $112.1 billion, up from $28.2 billion a year earlier, but that number carried a roughly $99 billion one-time gain, mostly unrealized gains on equity holdings. The operating business did not suddenly quadruple its profit. Strip the paper gain away and the picture is a company whose cash went out the door faster than it came in.
Chief financial officer Anat Ashkenazi defended the higher spending on the analyst call. "We're still in a supply-constrained environment," she said, adding that capacity had grown sharply over three years and demand kept outrunning it. Chief executive Sundar Pichai framed the moment as the start of something larger, telling investors the company was in "very early innings" of a lasting shift and had grown more bullish over the past year.
Shares did not reward the optimism. The stock fell close to 5% after the capex update.
Why record cloud growth didn't save the stock
Google Cloud was the standout. Revenue jumped 82%, operating margin expanded to 35.6%, and the order backlog swelled by more than $50 billion in a single quarter to reach $514 billion. Demand ran so far ahead of supply that executives said they would rent data-center capacity from other companies to serve customers, a move that will pressure margins in the near term.
"Google Cloud was an absolute blow out," said Richard Clode, portfolio manager at Janus Henderson Investors' Global Technology Leaders. He pointed to an edge that runs the length of the stack, from Alphabet's custom AI chips through to distribution across billions of users.
That edge is precisely what raises the bar for everyone else. Google Cloud has been growing faster than its larger rivals for several quarters, a sign it may be taking share. At least 20 brokerages lifted their price targets after the results, pushing the median to $430, about 26% above the last close. Citizens went highest at $515. TD Cowen sat at the bottom at $240.
The spread between those two targets captures the disagreement. Growth is real, and so is the bill.
Next week is the real test
Alphabet reported first, so it absorbed the first blow. The next readings arrive over the coming days. Microsoft reports next week, as do Amazon and Meta Platforms.
Their shares moved before Alphabet's peers had said a word. All three slipped between 2% and 4% in premarket trading Thursday, with Alphabet leading the decline at 5%. Investors are betting the others will follow Alphabet's lead and raise their own spending forecasts while the payoff still lags the outlay.
The projected cash math explains the nerves. Analysts expect both Alphabet and Amazon to burn cash across 2026. Meta's free cash flow is forecast to shrink 95.7% to just $1.85 billion. Microsoft, whose fiscal year ends next June, is expected to bring in $25.39 billion in cash, less than half the $58.74 billion of the prior year.
A cleaner way to see the shift is the share of every sales dollar being poured back into building. That ratio is set to nearly double this fiscal year across the group. Meta is expected to reach 54.9% from 35.9%, Microsoft 45% from 31%, Alphabet 41% from 23%, and Amazon 25% from 18%.
Combined, the four are on course to spend more than $700 billion this year.
Cloud growth rates will shape how forgiving the market feels. Amazon Web Services, the largest U.S. cloud provider, is expected to post about 31% growth for the quarter, up from 28.4% in the prior three months. Microsoft's cloud is expected near 40%, roughly matching its previous quarter. Microsoft's stock has already fallen close to a fifth this year, the worst showing in the group of megacaps known as the Magnificent Seven.
The bill is being financed, not paid from earnings
The defining feature of this cycle is where the money comes from. These companies once funded expansion out of their own cash flow. Now capital markets are doing the heavy lifting, through bond sales and equity raises earmarked for data centers and chips.
"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. He noted that the market's most dependable cash generators are now spending more than they bring in, and warned that the room for error shrinks with each quarter as capital carries a real cost again.
Charu Chanana, chief investment strategist at Saxo Markets, sees the risk skewed toward still higher spending while Microsoft and others remain capacity-constrained. The question she expects investors to press is how much cash has to be reinvested simply to stay competitive, and whether AI revenue can grow faster than the capital spending and depreciation stacking up behind it.
A commoditization worry sits at the edge of the story
There is a longer-term threat the spending race may be creating for the spenders themselves. As raw compute becomes easier to get and models get cheaper to run, one pool of cloud capacity starts to look much like another.
Competition is deepening on that front. Meta is in talks to rent out computing power to Anthropic, pushing further into a market that already includes AI cloud specialists such as CoreWeave. Every new entrant renting out capacity adds supply.
"As compute becomes more available and models become cheaper, cloud capacity may look increasingly interchangeable," said Lale Akoner, global market strategist at eToro. "That could force providers to spend more while accepting lower returns."
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