Alphabet Inc. shares fell about 7% after the company reported a sharp rise in artificial intelligence-related spending that pushed its free cash flow into negative territory for the first time since its 2004 public listing.
The decline came despite strong second-quarter results. Alphabet reported revenue of $119.8 billion, up 24% year over year, while earnings per share reached $9.11, exceeding Wall Street expectations. Google Cloud continued to be a major growth driver, with revenue rising 82% to $24.8 billion and operating margins expanding to 35.6% from 20.7% a year earlier.
However, investor sentiment turned on the company’s accelerating capital expenditures. Alphabet spent $44.9 billion in the quarter, surpassing its operating cash flow of $39.1 billion and resulting in negative free cash flow of $5.9 billion. This marked a historic shift for the company, which has consistently generated positive free cash flow for more than two decades.
The company also raised its full-year 2026 capital expenditure forecast to between $195 billion and $205 billion, up from the earlier range of $180 billion to $190 billion. This is the third upward revision this year, reflecting escalating investment in AI infrastructure.
To finance the expansion, Alphabet has significantly increased its debt load. Long-term debt rose to $98.2 billion as of June 30, nearly double the $46.5 billion reported at the end of 2025. The increase follows $20 billion in U.S. dollar debt issuance and $31.8 billion in foreign currency notes. Alphabet also suspended share buybacks for a second consecutive quarter.
Analysts responded by lowering price targets while maintaining positive ratings. JPMorgan cut its target to $420 from $460, while Piper Sandler reduced its estimate to $395 from $445. Both firms retained Overweight ratings on the stock.
Chief Financial Officer Anat Ashkenazi signaled that spending pressures are unlikely to ease soon, warning that capital expenditures will rise further in 2027 and continue to weigh on profitability as demand for AI infrastructure exceeds available compute capacity. At the same time, Alphabet disclosed a $519.5 billion Google Cloud revenue backlog, highlighting strong demand underpinning its aggressive investment strategy.
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