Google Raises Capex, Wall Street Sells

High demand and ongoing supply constraints have pushed Google parent Alphabet (Nasdaq: GOOG) to increase its capital expenditure (capex) estimates for 2026. On last night’s Q2 2026 earnings call, the vendor shifted guidance for the second time this year to between $195 billion and $205 billion, up from $180 billion to $190 billion guided previously.

Stocks dropped on the news. As of this writing, Alphabet shares were trading down over 7%. Investors weren’t clear that the company’s spending goals would tally with its ability to pay for it all.

Still, Alphabet maintained that it’s facing so much demand for its AI infrastructure on Google Cloud Platform (GCP) that it needs to turn to third-party supplies of capacity (aka neocloud or altcloud services)—a strategy the company notes will weigh on its profitability. CFO Anat Ashkenazi said on last night’s earnings call:

“Given the supply-constrained environment, we plan to expand the use of third-party capacity in Q3 as a bridging strategy while we build out more internal capacity. This strategy allows us to keep growing our customer base and capture greater overall value. However, it will create modest margin pressure in the near term as we utilize this capacity.”

Can the Capex Be Justified?

Alphabet management pointed to the dramatic growth of Google Cloud services as an example of its need for more infrastructure. Cloud revenue grew 82% year-over-year (y/y) during the quarter, to $24.8 billion, or just over 20% of $119.8 billion quarterly sales, which were up 24% y/y.

In addition, there’s a $514 billion backlog in Google Cloud, driven by AI demand, management said. “The Google Cloud segment delivered outstanding results in the second quarter, driven by our enterprise AI products and services,” said CFO Ashkenazi.

Capex in the quarter was $44.9 billion, up 26% sequentially and 100% y/y, “with the vast majority of this spent in technical infrastructure to support our investments in AI,” according to the CFO.

But there are signs of potential issues behind the rising capex. In line with an industry trend, free cash flow dropped to negative $5.9 billion in the quarter, down from positive $10 billion last quarter. Alphabet also has increased its debt, raising it from about $16 billion last year to about $100 billion at the end of this quarter.

Financial analysts on last night’s call wanted some answers about the capex increase. How much will present increases carry into 2027? The CFO said last night:

“Our goal is to invest as long as we see an attractive return on that investment…. We do take a long-term view, so we take multi-year view at what the needs are, as well as focus on next year and the near term and building aggressively to meet those demands. As you've seen, while we have increased our capacity quite significantly over the past three years, the demand still outpaces that investment…. As long as we see these attractive opportunity to invest, we will continue to invest.”

There are also questions about hyperscaler capex overall. While hyperscalers as a group have predicted over $700 billion in capital spending for 2026, questions persist about whether that's justified by market realities. On July 1, Bloomberg reported that Meta is setting up a cloud-based business selling AI compute and models. If Meta, which planned to buy “millions” of GPUs from NVIDIA earlier this year, now doesn’t need those chips for its own use, what does that say about AI demand?

Google Momentum Questioned

Wall Street also wants to know how Google intends to keep pace in AI with its frontier models and TPU chips, the latter of which Google says are selling well though substantial revenues won't materialize until next year. The company’s Gemini 3.5 Pro model, much in demand by enterprise customers, has slipped its June availability date, prompting questions about how well Google can compete against rivals such as OpenAI and Anthropic.

“Gemini 3.5 Pro is currently in testing, and our team is already building the next generation of models,” said Alphabet CEO Sundar Pichai last night. “We have started our most ambitious pre-training run yet for Gemini 4 and are excited by the progress we are seeing at the frontier.“

Pichai also acknowledged areas in which Google is lagging. “There are many attributes on which we are still at the frontier. There are areas where we've acknowledged we need to improve. Coding and agentic coding is an example of that, and the teams are very focused on it,” he said.

Google also touts its “full stack” overall efficiency as a selling point for all of its products. Recently announced Gemini Flash series models promise to reduce cost per token as well as overall token usage. Still, token usage is also an argument for greater capex: Over the past year, Google says that about 500 customers have used over 1 trillion tokens on its infrastructure. And over 2,000 enterprises have consumed over 1 billion tokens.

Futuriom Take: Google’s increased capex guidance seems to be in line with the growth of its AI cloud services. But Wall Street needs proof that the company’s parent Alphabet won’t suffer from the increase with reduced profitability and increased debt. Still, while the company’s growth is strong, the level of spending seems to be a risk worth taking.