Alphabet reported negative free cash flow for the first time since it went public in 2004 after spending $45 billion on capital expenditures last quarter. A note in its 10-Q filing shows the company has already committed to another $811 billion, mostly on artificial intelligence. Management points to a $520 billion pile of remaining performance obligations as the reason to keep spending.
Capital expenditures reached $45 billion at Alphabet last quarter, double what it spent a year ago, and that bill pushed the company to negative free cash flow for the first time since it went public in 2004. Some investors are worried about how much it is putting into artificial intelligence.
The company is not slowing down. Alphabet raised its full-year 2026 capital expenditure budget to between $195 billion and $205 billion alongside the earnings release, and said capex will "increase significantly in 2027."
The $811 billion stays off the balance sheet
A brief note in Alphabet's 10-Q filing with the SEC disclosed purchase commitments and other contractual obligations totaling $811 billion as of the end of the second quarter — up from $332 billion at the end of the first quarter. None of it shows up on the balance sheet.
These long-term supply agreements help Alphabet secure its chip supply, data center construction, and energy services, and may lock in guaranteed supply or favorable rates through take-or-pay contracts years into the future. The company expects to generally fulfill all of its agreements by 2030, while the energy service agreements range from two years to 26 years, with obligations running through 2054.
A $520 billion backlog behind the bet
Management has reason to make the bet. Alphabet's remaining performance obligations climbed to $520 billion as of the end of June — contracted revenue that offsets the commitments.
But the company also says it faces a severe shortage of compute capacity as it takes on massive, multi-year deals. As a result, it plans to add capacity through third-party providers as a bridge until it can build out more of its own, which will hit margins in the short term.
TPU sales push inventory to $10 billion
Alphabet is also ramping up direct sales of its custom Tensor Processing Unit systems, which requires further commitments to its chip design partners to lift sales in 2027 and beyond. Its inventory jumped from $2.4 billion to $10 billion last quarter, and potential TPU sales could become another significant driver of those long-term supply agreements.
Some investors may balk at the $811 billion headline figure. Yet the core operations still throw off cash, and the cloud business is producing very strong returns on invested capital.
Source: The Motley Fool
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