Investment Thesis
Alphabet’s (NASDAQ:GOOGL) (NASDAQ:GOOG) Q2 2026 earnings report confirms the main thesis that the returns on record-high CapEx are beginning to materialize as a reward for developing AI infrastructure. Evidence of this is the record growth in the cloud segment (up 82% YoY to $24.8 billion), which was driven, in part, by sales of enterprise AI solutions. Meanwhile, GOOGL’s financial results are laying a solid foundation for further growth in the AI assets market, with the monetization of new products proving successful.
As the company continues to face a shortage of computing resources, the CapEx forecast for 2026 has been raised to $195–205 billion (from $180–190 billion) to fund their construction, with most of that amount earmarked for semiconductor purchases. This is precisely why my rating on GOOGL stock remains at “Buy”. In addition, though, I am becoming increasingly confident that the supercycle will continue, which increases the appeal of stocks such as Nebius (NBIS), Micron (MU), Credo (CRDO), Nvidia (NVDA), Marvell (MRVL), and others.
Negative FCF is only temporary
Once again, many investors are viewing CapEx not as a positive factor, nor as a negative one. The main argument they cite is that record-high capital expenditures are causing FCF to turn negative (in Q2 2026, FCF was negative by $5.9 billion), something that is unusual for such a profitable company. Meanwhile, the monetization of AI continues to be called into question, even though I believe the growth of the cloud segment over the previous quarter fully offsets these risks.
The figure below shows the projected free cash flow (FCF) trends for the largest hyperscalers, demonstrating how significantly the situation will change starting in 2028. And by 2030, the total FCF will be three times higher than the figures for 2023–2025. The years 2026–2027 will be a period of decline due to record-high CapEx, with the Big Four—GOOGL, Meta (META), Amazon (AMZN), and Microsoft (MSFT)—alone financing $725 billion in capital expenditures this year.
Image credit: Financial Times (Data: S&P Capital IQ, Bloomberg)
Consequently, in Q2 2026, GOOGL’s CapEx reached a record $44.9 billion, while growth to $50.4 billion is projected for the following quarter. At the same time, in one year, quarterly CapEx will reach $65.2 billion, whereas FCF will be -$1.2 billion.
Image credit: Author
Also, it’s worth noting that the company’s total debt increased from $90.5 billion to $112.7 billion. But this rise in debt is offset by an increase in cash reserves from $126.8 billion to $242.4 billion. However, this can hardly be called a positive development, since the increase in cash reserves was achieved by diluting shareholders’ equity. It is a significant shift for a company that frequently engages in share buybacks.
Image credit: Author
According to GOOGL’s CEO, though, no further stock offerings are expected. The next round of investments will be financed through operating cash flow, reserves, and debt. A big chunk of the investments is aimed at meeting the strong growth in demand for Google Cloud, which saw its order backlog increase from $460 billion to $514 billion.
Risks exist, but they will not alter the trajectory of development
I believe that the question of ROI on investments in AI infrastructure should be removed from the agenda because of the rapid growth of the cloud segment and its profitability. Order backlog has increased to $514 billion, proving that GOOGL’s new products will recoup the CapEx invested in them in the future. There is, of course, a chance that not all preliminary contracts will be fulfilled. That’s why the company’s primary goal is to expand its computing capacity (mostly because contracted cloud services might not be provided due to a lack of capacity, leading to contract cancellations). Given GOOGL’s available resources and assets, the company is well-positioned to meet this challenge.
According to the company’s CEO, the more significant threat is a supply shortage caused by a lack of computing resources. As a result, GOOGL will turn to third-party resource providers as a temporary safeguard. This is precisely why I believe this earnings report sends a strong signal of growth not only for semiconductor manufacturers but also for neo-cloud companies such as NBIS.
The current upward revision to the CapEx forecast, though, is less a result of the need to scale the company’s AI infrastructure and more a result of rising prices for the equipment and components used to build the data centers themselves. The manufacturers of GPUs, TPUs, DRAM, optical and copper interconnects, as well as other components, are the beneficiaries of Alphabet’s latest report.
This means, for GOOGL, a definite increase in the cost of services and higher CapEx to expand the necessary AI infrastructure. Because of this, the company’s operating margin rose to 34%, even though many had predicted it would reach 40%. So, the temporary decline in business margins is not a hypothetical risk, it’s a real one.
Image credit: Author
Conclusion
In conclusion, GOOGL’s quarterly earnings report addresses the market’s main concern regarding ROI in the cloud segment. The explosive growth of Google Cloud, which has expanded its order backlog to $514 billion, proves that record-high CapEx is not merely an abstract aspiration but a fundamentally sound decision aimed at further monetizing opportunities. The increase in capital expenditure forecasts for 2026 will temporarily push FCF into negative territory, and the growth of hardware-related components will increase pressure on the operating margin. These changes, though, will be temporary, as they’re necessary to address the shortage of computing power.
Hence, key takeaways for investors include not only maintaining the “Buy” rating on GOOGL shares but also the emergence of a strong signal for the semiconductor and AI infrastructure markets. The shortage of components is driving up their prices, increasing margins for manufacturers. Therefore, a large portion of my portfolio consists of the aforementioned companies and other firms benefiting from the AI supercycle.
Analyst’s Disclosure: I have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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