Alphabet's AI spending pushes free cash flow into the red for first time

Alphabet's (GOOG)(GOOGL) aggressive investment in artificial intelligence pushed it into negative free cash flow in the second quarter for the first time since going public, highlighting the growing financial cost of the AI infrastructure race.

The Google parent reported negative free cash flow of $5.9B for the quarter ended June, well below analyst expectations, after sharply increasing spending on data centers and AI hardware.

"We expect that free cash flow will remain under pressure driven by our investments in technical infrastructure, which enable us to capitalize on the AI opportunity and continue to drive attractive returns," chief financial officer Anat Ashkenazi said.

The firm also raised its 2026 capital expenditure guidance to $195B-$205B, up from the prior forecast of $180B -$190B, sending the stock down about 3.5% in after-hours trading. The higher spending plan marks Alphabet's second capex increase this year as it competes with Meta, Microsoft and Amazon to expand AI infrastructure. Together, the four hyperscalers are expected to spend more than $725B on AI infrastructure in 2026.

The move into negative free cash flow, coupled with the additional $15B increase in planned capital spending, is likely to heighten investor concerns over the scale and pace of Alphabet's AI investments.

Free cash flow is closely watched because it measures the cash remaining after operating expenses and capital expenditures, providing an indication of a company's ability to reduce debt or return capital to shareholders.

To finance its AI expansion, Alphabet has accumulated nearly $100B in debt and, in June, announced plans to raise roughly $85B through its first share sale in more than two decades—a significant shift for a company long known for repurchasing its own stock.

The investment is aimed at supporting growing demand for Google Cloud, with its backlog of signed contracts rising to $514B at the end of the second quarter from about $460B in the prior quarter.

Ashkenazi said the company is funding its investments through operating cash flow, debt and the previously announced equity issuance, adding that Alphabet has no plans for additional share sales beyond those already disclosed.

“We have expanded our debt portfolio quite significantly over the past 12 months. If you've seen a year ago, we were at about $16 billion, and we went to about $100 billion across multiple currencies and geographies,” Ashkenazi said. She added that the company also wants to maintain "a resilient balance sheet and a strong balance sheet."