Alphabet raised its 2026 capital expenditure guidance to a range of $195 billion to $205 billion, up from $180 billion to $190 billion. Almost none of that spending has reached the income statement yet, because equipment costs hit earnings later as depreciation. The heaviest charges from this year's purchases start landing in 2027.
Alphabet raised its 2026 capital expenditure guidance to a range of $195 billion to $205 billion when it reported second-quarter results last week, up from $180 billion to $190 billion. The company spent $44.9 billion on capital expenditures in the second quarter alone, and free cash flow for the period ran negative $5.9 billion.
Six-year server lives set the schedule
When Alphabet buys a server, the purchase price spreads across the machine's useful life in equal annual slices rather than reducing profits up front. Alphabet sets that life at six years for servers, a figure it adopted in 2023 after concluding its machines last longer than it previously assumed.
Chief financial officer Anat Ashkenazi supplied the split that makes the arithmetic possible. About 60% of last quarter's infrastructure investment went to servers, she said on the second-quarter earnings call, with the remaining 40% going to data centers and networking equipment.
Applying that share to the full year, The Motley Fool's Daniel Sparks calculates that Alphabet is buying about $120 billion of equipment that depreciates over six years at the midpoint of guidance — about $20 billion of annual depreciation expense from this year's purchases alone, recurring every year into the early 2030s. Data centers themselves spread their cost over as long as 40 years. Management still expects capital expenditures to increase significantly in 2027.
Depreciation is already climbing
Earlier waves of spending are showing up now. Other cost of revenues rose 22% year over year to $29.8 billion, with depreciation among the drivers management named. Research and development expense grew 32%, driven by pay for artificial intelligence talent and, again, depreciation.
According to The Motley Fool, Ashkenazi said the surge in infrastructure investment "will continue to put pressure on the P&L in the form of higher depreciation expense" and related data center operating costs.
Growth is outrunning the bill so far
The spending is buying growth that shows up as clearly as the charges do. Revenue rose 24% year over year to $119.8 billion, the company's 12th straight quarter of double-digit growth. Google Cloud revenue grew 82% to $24.8 billion, and the segment's operating income more than tripled to $8.8 billion.
Cloud's backlog climbed by more than $50 billion sequentially to $514 billion, while operating income for the whole company grew 30%, faster than revenue. For scale, Alphabet's operating income last quarter was $40.8 billion.
But the two lines behave differently. Depreciation compounds on a fixed schedule, while revenue does not, and management has already told investors that free cash flow will likely stay under pressure as well. Shares traded near $335 as of the report's writing, about 18% below their 52-week high.
Source: The Motley Fool
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