Alphabet raised its 2026 capital spending forecast to as much as $205 billion, and the stock has since dropped to 16% off its all-time high. Management argues the spending funds AI infrastructure demand that already outstrips supply, and the stock now trades near its lowest price-to-earnings ratio ever.
Alphabet lifted its 2026 capital expenditure forecast to a range of $195 billion to $205 billion, up from an earlier estimate of $180 billion to $190 billion. The stock fell afterward and now sits 16% off its all-time high, even though the underlying second-quarter report was otherwise strong.
Spending to keep up with AI demand
Alphabet CEO Sundar Pichai and CFO Anat Ashkenazi told investors on the second-quarter earnings call that demand for AI infrastructure is outstripping supply, and that the company needs to expand capacity to meet it. Both executives reiterated that they expect solid returns on the investment.
The market's concern is different: Alphabet isn't generating enough cash from operations to cover the data center build-out. As a result, the company is taking on more debt and selling fresh equity to fund it. Alphabet was free-cash-flow negative in the second quarter, and management said cash flows would stay under pressure while the investment continues.
Cloud backlog keeps growing
Alphabet's cloud unit posted an 82% year-over-year increase in cloud revenue in the second quarter on AI-driven demand. Its backlog grew by $50 billion sequentially to $514 billion, and management expects to recognize half of that backlog as revenue over the next two years.
At the current price, Alphabet trades at a P/E ratio of 17, just off its lowest valuation ever by that metric. The stock also carries a major position from Berkshire Hathaway's Warren Buffett and Greg Abel, one of the conglomerate's largest equity holdings.
Source: The Motley Fool
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