Alphabet spent $44.9 billion on AI infrastructure between April and June, about $490 million a day, while the business generated $39.1 billion in cash. The $5.9 billion gap is Google's first negative free cash flow quarter since it went public in August 2004, and the stock fell after finance chief Anat Ashkenazi raised the full-year spending plan again.
Alphabet spent $44.9 billion on chips, servers and data centers last quarter and generated $39.1 billion in cash, leaving it $5.9 billion in the hole. That works out to about $490 million a day, and it is Google's first ever quarter of negative free cash flow since the company went public in August 2004, ending a 22-year run of generating more cash than it spent every quarter.
Investors priced the spending plan rather than the print. The stock fell 4.24% in after-hours trading as soon as the company told analysts it would raise its full-year spending plan by another $15 billion — a drop that came despite revenue topping Wall Street estimates.
Search and cloud revenue keep climbing
The results themselves were strong. Revenue rose 24% to $119.8 billion, with Search and other up 17% to $63.3 billion and YouTube ads up 13%. Google Cloud grew fastest of all: revenue jumped 82% to $24.8 billion, operating profit climbed from $2.8 billion to $8.8 billion year-over-year, and its backlog of signed but unbilled work reached $514 billion.
Profit is the softer half of the picture. Google reported $9.11 in earnings per share, but a $99 billion paper gain on stocks it holds accounted for $6.26 of that, by the company's own accounting. Strip out that one-time gain and earnings land near $2.85 a share, roughly in line with the $2.88 analysts expected.
Debt and share sales replace surplus cash
Ashkenazi raised the spending plan for the year to between $195 billion and $205 billion, up from $180 billion to $190 billion, and said 2027 would be higher still. Google holds more than $240 billion in cash and investments, yet in June it sold $49.6 billion in stock, including preferred shares that carry a 6.25% dividend, and issued $20.3 billion in bonds.
It also stopped buying back its own stock, after repurchasing $13.2 billion in the same quarter last year. That shift reaches ordinary shareholders, because buybacks cut the number of shares outstanding and lift the value of each one left, while issuing new stock spreads ownership thinner.
The longer-term worry is depreciation
Cloud operating margins widened from 20.7% to 35.6% in a year, and Google expects to book more than half of the $514 billion backlog as revenue within two years. Over the past year the company still produced $185.7 billion in operating cash and $53.3 billion in free cash flow, and it holds $242.5 billion in cash and securities.
But free cash flow has dropped over three straight quarters — $24.6 billion, then $10.1 billion, then negative $5.9 billion — while the spending behind that slide keeps rising. The chips Google is buying lose value over time, and the resulting depreciation will weigh on profits for years, whether or not AI demand holds.
Ashkenazi said demand for AI computing is running ahead of what Google can build, and that the company will keep investing "as long as we see an attractive return on that investment." She has also warned that most revenue from Google's own AI chips, known as TPUs, won't arrive until 2027.
Source: Moneywise
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