By Deborah Mary Sophia and Kenrick Cai
July 22 (Reuters) – Alphabet on Wednesday reported its best-ever quarter of growth for its cloud computing division, but faced investor scrutiny after concerns about continued delays to its flagship AI model were aggravated by a $15 billion increase in capital spending plans for 2026.
The search giant now expects to spend between $195 billion and $205 billion in capital expenditures, its finance chief Anat Ashkenazi said on a conference call with analysts. The company said last quarter that it planned to spend between $180 billion and $190 billion this year.
Shares of the company were down about 3% in extended trading. The stock was initially volatile but mostly flat, but dipped after Ashkenazi announced the capex update.
“We have increased our capacity quite significantly over the past three years. The demand still outpaces that investment,” Ashkenazi said in justifying the increased spending plans. She added that faster-than-expected delivery of capacity contributed to the hike.
Revenue at Google Cloud rose 82% to $24.8 billion during the quarter ended June, driven by strong demand from AI-hungry enterprises worldwide. Analysts on average expected a 64% increase, according to data compiled by LSEG.
Advertising revenue came in at $81.6 billion compared to estimates of $81.1 billion. Total revenue for the quarter was $119.8 billion, beating the consensus estimate of $116.9 billion.
But, adjusted profit per share of $2.85 fell slightly short of Wall Street projections of $2.89. And the company reported negative free cash flow for the first time in its history, burning $5.9 billion this quarter.
“After a negative cash flow quarter, the new raise in capex does not sit well for Alphabet,” said Thomas Monteiro, senior analyst at Investing.com. “The market’s most reliable cash generators are now spending more than they bring in. As long as revenue keeps accelerating, investors will tolerate it. But capital has a real cost again, and the room for error is shrinking every quarter.”
MODEL UNCERTAINTY TEMPERS CLOUD GAINS
While Google Cloud has made Alphabet a big beneficiary of the AI boom, the company’s own AI efforts have lost some steam this year after it delayed the June launch of its next flagship model, Gemini 3.5 Pro.
That has left Google trailing in the AI coding tools market and fueled concerns on Wall Street, especially as Anthropic and OpenAI have consistently rolled out enterprise-focused upgrades, and Chinese open-source models have also gained strong traction.
During the question-and-answer portion of the earnings call, multiple analysts pressed CEO Sundar Pichai for clarity around whether Google could keep with its rivals at the frontier of model development.
“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,” Pichai said on the call.
Pichai said that while Google continued to test Gemini 3.5 Pro, it had also started training Gemini 4 and was “applying a lot of our compute and effort in that direction” in order to remain competitive.
“We are both very committed and very confident of being at the frontier for the next generation,” he said.
Meanwhile, Google began recognizing revenue from direct sales of its TPU chips, which compete with Nvidia’s GPUs, for the first time in the second quarter though the vast majority of revenue from business agreements would come through next year, Ashkenazi said.
The third-largest cloud services provider behind Amazon Web Services and Microsoft, Google has seen demand surge as companies race to secure the cloud capacity needed to develop, train and run AI models, helping it land major deals with firms, including Anthropic.
Big Tech is expected to spend well over $700 billion this year primarily on AI, while Morgan Stanley has pegged the estimated spend at more than $1 trillion for the next year.
Ashkenazi reaffirmed on the call that Alphabet planned another significant increase to capex in 2027.
Alphabet shares have been among the best performers in the “Magnificent 7” group of stocks this year so far, rising more than 9% through last close. But concerns over the Gemini delays, some high-profile executive departures and regulatory pressures have dragged the stock about 9% lower since the end of April.
Rivals Microsoft and Amazon are set to report their quarterly earnings next week.
(Reporting by Deborah Sophia in Bengaluru and Kenrick Cai in San Francisco; Editing by Shilpi Majumdar and Aurora Ellis)
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