Google reports record $44.9B quarterly capex for AI data centers, company cash-flow negative for first time; CFO warns capex will increase further in 2027
Alphabet reported negative free cash flow of $5.9 billion for the second quarter of 2026, the company's first cash-negative quarter since its 2004 IPO. The deficit stems from capital expenditures that doubled year-over-year to a record $44.9 billion, exceeding the $39.1 billion its operations generated as it accelerates its AI data center buildout. While the quarterly deficit is small relative to the company's total cash flow, Alphabet is covering the difference with borrowed money and new stock issuance. The company's trailing 12-month free cash flow remains positive at $53.3 billion.
CFO Anat Ashkenazi raised full-year capex guidance to between $195 billion and $205 billion, up from the prior $180 billion to $190 billion estimate. Ashkenazi disclosed that Google delivered TPU systems to customers' data centers for the first time, marking a shift from exclusively renting the chips through Google Cloud. She also warned that capex will rise significantly again in 2027 and that free cash flow will remain under pressure.
Approximately 60% of the quarter's technical infrastructure investment went into servers, with the remaining 40% split between data centers and networking equipment—an allocation that inverts typical hyperscaler spending by prioritizing compute over construction. Most of Alphabet's incremental capex now purchases compute, primarily its own TPU-based systems. Depreciation of property and equipment rose to $7.1 billion in the quarter from $5.0 billion a year earlier, and Ashkenazi cautioned that infrastructure spending will continue pressuring the profit-and-loss statement through higher depreciation and energy costs.
The company remains in a supply-constrained environment with demand far outpacing its build schedule. Alphabet is renting third-party capacity as a bridge while its data centers come online—an arrangement that will create modest margin pressure for its Cloud segment in Q3. The construction pipeline includes a $40 billion, three-campus program in Texas through 2027, representing the company's largest state investment, and a $1.5 billion expansion of its Jackson County, Alabama campus announced in June.
Google began recognizing revenue from TPU system sales in Q2, with Ashkenazi noting that the vast majority of revenues from these agreements will be realized in 2027. Inventory surged to $10 billion on June 30, roughly four times the $2.4 billion recorded at the end of 2025, as the company manufactures hardware for sale to customers next year. This inventory reflects cash outflows that will convert back to cash upon sale, differing fundamentally from data center capex, which is depreciated over years of use.
Anthropic is anchoring substantial external demand, having secured access to up to one million TPUs and more than 1 gigawatt of capacity coming online this year under an October 2025 agreement. A Broadcom securities filing revealed roughly 3.5 gigawatts of additional TPU capacity from 2027, locking Broadcom into future TPU generations through 2031. Meta entered talks for multi-billion-dollar TPU deployments in its own data centers in November. Google's current flagship, the seventh-generation Ironwood TPU, carries 192GB of HBM3E per chip and scales to 9,216-chip pods rated at 42.5 FP8 exaflops.
Every TPU Google manufactures simultaneously trains and serves Gemini, runs Search and YouTube inference, serves Cloud customers, and ships as sold hardware. No other hyperscaler's capex spending performs this many functions, and none has a chip business generating third-party revenue at this stage.
Alphabet issued Class A, Class C, and mandatory convertible preferred stock in June for net proceeds of $49.6 billion, designated for capital expenditures to scale AI infrastructure and global compute. The company also sold $20.3 billion of senior unsecured notes during the quarter. Long-term debt reached $98.2 billion on June 30, up from $46.5 billion at the end of 2025 and from roughly $16 billion a year prior. A February bond program alone raised more than $30 billion across multiple currencies, including a 100-year sterling tranche.
The four largest hyperscalers plan combined 2026 capex of approximately $725 billion, up 77% from 2025. Alphabet's new guidance range now leads the group alongside Amazon's roughly $200 billion spend. Meta raised its own 2026 forecast to $125 billion to $145 billion in April, citing component pricing and competition for land, power, and labor.
Alphabet's headline Q2 net income of $112.1 billion overstates underlying reality; $99.0 billion of other income derived primarily from unrealized gains on equity securities, contributing $6.26 of the $9.11 diluted EPS. Operating income, the cleaner measure, rose 30% to $40.8 billion. Google Cloud grew 82% to $24.8 billion with an operating margin of 35.6%, while backlog reached $514 billion, up more than $50 billion sequentially, with just over half expected to convert to revenue within 24 months. These contracts represent the collateral behind the spending, with the buildout chasing already-booked demand rather than anticipated future requirements.
Operating cash flow grew 41% year-over-year in Q2, but the coming quarters will determine whether this growth can outpace capex spending showing no signs of slowing.