Alphabet, Google's parent company, saw its shares drop nearly 4% after announcing a further increase in its 2026 capital expenditure (CapEx) to $195 billion–$205 billion from its earlier forecast in Q1. The company disclosed it spent $44.9 billion in a single quarter, causing free cash flow to turn negative for the first time since its public listing.
Despite overall better-than-expected earnings, the accelerated investment has led investors to closely monitor the company, as the substantial spending to compete in the AI race is expected to continue pressuring the company’s cash flow in the near term.
For Q2 ending 30 June 2026, Alphabet posted total revenue of $119.796 billion, a 24% increase from the prior year, exceeding analyst estimates. This growth was primarily driven by Google Cloud, which posted its strongest revenue increase in several quarters at $24.768 billion, up 82%, fueled by ongoing demand for AI infrastructure and enterprise AI services.
Meanwhile, revenue from Google Services (Search, YouTube, and Android) totaled $94.5 billion, marking a 15% increase.
Operating profit rose 30% to $40.77 billion, with an operating margin expanding to 34%. Net income surged nearly fourfold to $112.107 billion, driven largely by $99 billion in other income from investment gains, mainly from increased valuations of holdings in companies such as Anthropic and SpaceX.
In this quarter, Alphabet's CapEx reached $44.9 billion, doubling from the previous year. Anat Ashkenazi, Chief Financial Officer (CFO) stated that nearly all the investment was directed towards building AI infrastructure, with approximately 60% spent on AI servers and the remaining 40% on data centers and networking equipment to support rising AI demand.
This accelerated investment caused free cash flow to fall to negative $5.9 billion, marking the first time since Google's IPO that free cash flow turned negative, due to AI investments exceeding operating cash flow.
The company indicated that free cash flow will remain pressured as it continues to rapidly build AI infrastructure to meet growing demand. It also raised its 2026 CapEx forecast for the second time this year—from an earlier $180 billion–$190 billion to $195 billion–$205 billion—reflecting intensified competition with Microsoft, Meta, and Amazon in AI infrastructure, despite short-term cash flow and return pressures.
Previously, investors considered Alphabet best positioned to handle AI competition because its Search business generated massive cash flow. However, the company’s clear commitment to large AI investments has led the market to question the short-term returns on these investments.
. Sundar Pichai, Chief Executive Officer (CEO) of Google and Alphabet, said this quarter was another standout period for the company, with results reflecting Google’s full-stack AI strategy—from processors and data centers to AI models and user-facing products—delivering tangible value to consumers, enterprise customers, and partners worldwide.
He further revealed that AI is beginning to generate clear returns, with nearly 90% of Fortune 100 companies using Gemini Enterprise. The Gemini app has 950 million monthly users, and Google plans to accelerate development of Gemini 4 to compete with OpenAI and Anthropic.
While this quarter’s results clearly show AI translating into real revenue and profits for Alphabet, especially through Google Cloud as a new growth engine, Alphabet is also entering its most intensive investment phase in company history.
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Sources Alphabet , CNBC , CNBC , Financial Times
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