Alphabet posts first negative free cash flow since IPO

Alphabet ↘ 3.58% shares fell roughly 7% on Thursday after the Google parent disclosed a massive increase in artificial intelligence infrastructure spending that produced its first negative free cash flow quarter since going public more than two decades ago.

The sell-off came despite what was otherwise a strong second-quarter report. Alphabet posted revenue of $119.8 billion, up 24% year over year, while earnings per share reached $9.11, beating Wall Street estimates. Google Cloud revenue surged 82% to $24.8 billion, with operating margins in the division expanding to 35.6% from 20.7% a year earlier.Moneycontrol+1

The Cash Burn That Spooked Wall Street

The headline number that rattled investors: Alphabet spent $44.9 billion on capital expenditures in the quarter, exceeding operating cash flow of $39.1 billion and producing negative free cash flow of $5.9 billion. It marked the first time since Alphabet's 2004 IPO that the company failed to generate positive free cash flow in a quarter.Musings from BluBird Capital+2

The company simultaneously raised its full-year 2026 capital expenditure guidance to $195–$205 billion, up from the $180–$190 billion range set earlier this year. It was the third consecutive quarterly increase to the capex forecast, which began the year at $175–$185 billion.Investing.com+3

Debt Surge and Buyback Suspension

To fund the buildout, Alphabet has nearly doubled its long-term debt. The balance sheet showed $98.2 billion in long-term obligations as of June 30, after the company issued $20 billion in U.S. dollar notes and $31.8 billion in foreign currency notes. That figure compares to roughly $46.5 billion at the end of 2025. Alphabet also suspended share buybacks for a second consecutive quarter, according to Semafor.semafor.com+2

Analyst Reaction and 2027 Warning

JPMorgan ↘ 0.73% cut its price target on Alphabet to $420 from $460 while maintaining an Overweight rating. Piper Sandler ↘ 0.44% lowered its target to $395 from $445, also keeping an Overweight rating.Investing.com+1

CFO Anat Ashkenazi warned on the earnings call that capital spending will rise again in 2027 and "continue to put pressure" on profits as AI demand outpaces available compute supply. The company also disclosed a $519.5 billion Google Cloud revenue backlog, underscoring the demand driving its investment decisions.nntech+2