Alphabet Raises Capex to $205 Billion and Burns $5.9 Billion in Free Cash Flow This Quarter
Google Cloud grows 82% and operational margin triples to 35.6%, but the market reacts by cutting 5% off the stock after the company revised its 2026 capex for the third time this year.
Alphabet reported on Wednesday, July 22, revenues of $119.8 billion for the second quarter, a 24% increase over the previous year, with Google Cloud driving performance with an 82% jump to $24.8 billion. The operational margin of the cloud segment more than tripled year-over-year and ended the quarter at 35.6%. The contracted backlog in Cloud rose by about $50 billion during the quarter, reaching $514 billion. Nevertheless, shares fell 5% in after-hours trading.
The trigger for the reaction was the capex revision. The company raised its forecast range for 2026 from $175 to $185 billion to $195 to $205 billion, marking the third upward revision of the goal in eight months. In the second quarter alone, Alphabet spent $44.9 billion on investments, double the amount recorded in the same quarter of 2025. Free cash flow turned negative at $5.9 billion, compared to a positive generation of over $13 billion a year earlier.
"The increase in the range is primarily due to an acceleration in capacity delivery to meet growing demand," said Anat Ashkenazi, CFO of Alphabet, during the conference call. Sundar Pichai emphasized that investments in AI are driving growth across the business, with corporate adoption of Gemini and higher volume in Search, Cloud, and YouTube.
The Calculation Now Includes Negative Cash
The reading of the quarter depends on which axis the investor prioritizes. On the operational side, the cloud margin at 35.6% undermines the old argument that the segment was unprofitable. The backlog of $514 billion, with a sequential increase of $50 billion, signals signed contracts that will drive recognized revenue over the next two to three years. On the financial side, the negative free cash flow is the first sign in a decade that Alphabet is spending more than it generates to finance infrastructure, indicating that the company has started to tap into more debt and expand third-party capacity to meet the backlog of demand that its own capex does not cover this year.
Alphabet's figures enter a cycle where Amazon is guiding around $200 billion in capex for 2026, Meta is aiming between $115 and $135 billion, and Microsoft is expected to close above $120 billion. Together, the five largest investors in cloud and AI infrastructure in the United States are now operating between $660 and $690 billion in annual capex, about double the levels of 2025. Alphabet is now leading the pack within the platform bloc with cloud commercial revenue linked to investment, yet still had to acknowledge that the contracted capacity is not matching the pace at which customers are signing.
Insights for CIOs in Two Regions
For technology executives in the UK and Germany, the practical data is the public admission that demand for Vertex AI capacity exceeds what the company currently has. Ashkenazi confirmed that part of the accelerated capex is the purchase of third-party capacity to serve as a bridge until in-house construction is complete. Those operating Gemini and Vertex workloads in production should expect more flexible availability of reserved capacity in the next two quarters, and less advantageous negotiation in three-year contracts, with Alphabet reducing discounts where the queue has already formed.
In India, where Alphabet has been pushing through Cloud against AWS's installed base and Azure's expansion, the $205 billion figure shifts the competitive calculation of the partner channel. Consultancies that rely on TCS, Infosys, and Wipro to migrate corporate workloads from SAP and Oracle to Google Cloud gain concrete justification to accelerate migration, with the perception that Alphabet can support the technical effort over the next 24 months. The counterparty risk, a recurring theme in the architecture committees of these clients since Q1, diminishes.
The risk the company did not address in the call is the denominator. If Cloud revenue continues to grow at 80% per year, the capex pays off. If the growth rate slows to 40% in 2027, the same capex turns into accumulated depreciation of $200 billion waiting for ROI that does not arrive on time. Alphabet is betting that Gemini 3.6 Flash, launched this week, keeps the funnel open. The next two quarters will show if the corporate market is willing to pay for the capacity that Alphabet is pre-purchasing.