- Alphabet beat top line expectations in Q2 2026
- But free cash flow dipped into negative territory as AI build costs climbed
- Executives highlighted the supply constrained environment but that's not likely to change anytime soon
All eyes were on Alphabet earnings Wednesday, as investors sought the answer to a question increasingly looming over cloud providers: Can they balance infrastructure spending with growth?
The answer remains murky. While Alphabet’s revenue continued to climb, so did capex, ultimately driving free cash flow well into the red.
By the numbers
- Consolidated revenue: $119.8 billion
- Net income: $112.1 billion
- Operating income: $40.8 billion
- Free cash flow: -$5.9 billion
- Cloud backlog: $514 billion
- Q2 capex: $44.9 billion
Alphabet revenue jumped 24% year on year to $119.8 billion. Google also bagged an additional $98 billion in other income from “net unrealized gains on our equity securities.” In other words, the stocks Google holds dramatically raised in value but haven’t been sold yet.
All told, net income stood at $112 billion, while consolidated operating income rose from $31.3 billion to $40.8 billion. However, free cash flow – the operating money a company has left after funding capital expenditures – nosedived into the red, dropping to -$5.9 billion from $10.1 billion in Q1 and $5.3 billion in Q2 2025.
Google Cloud’s big quarter
Google Cloud revenue jumped 82% to $24.8 billion while operating income rose from $2.8 billion to $8.8 billion year on year. The segment’s margin rose from 20.7% to 35.6%.
Alphabet CFO Anat Ashkenazi noted that Google Cloud began to recognize revenue from sales of its TPU systems, marking a major first in the quarter. She added revenue from TPU deals it has signed will continue to ramp through this year, but the majority will be recognized in 2027.
Google Cloud’s backlog hit $514 billion, up from $460 billion in Q1 2026 and $106 billion in Q2 2025. CEO Sundar Pichai said the company is seeing “strong demand” for its AI infrastructure products.
But capex continued to climb, hitting $44.9 billion – more than double the $22.4 billion it spent in Q2 2025 and $9.3 billion more than it spent last quarter. Alphabet has said it expects to spend between $180 billion and $190 billion in capex this year and capex to climb even higher in 2027.
Asked how it plans to balance cost and growth going forward, Ashkenazi said: “We are seeing very strong demand, both from external cloud customers as well as across the business. And our goal is to invest as long as we see an attractive return of that investment.”
Ashkenazi highlighted continued supply constraints and said while Alphabet has significantly increased its compute capacity over the past three years, demand is still outpacing its investments.
The supply and cost issues aren’t likely to be resolved soon. Circular Technology Global Head of Research Brad Gastwirth pointed out in a recent note to investors that GPUs are far from the only constraint – or cost – in the AI infrastructure stack.
"The biggest development this month is not a single shortage. It is the breadth of inflation now appearing across the electronics ecosystem,” he wrote. “Broad based bill of material inflation is emerging as one of the defining themes of the second half of 2026."