The Cloud Business Is Booming - Maybe Too Much
It is a strange spot to be in. Your cloud division blows past expectations, customers are spending way more than they agreed to, and yet your stock takes a beating.
That is exactly what happened to Alphabet on July 23. Google Cloud posted an 82% jump in revenue from a year earlier. CEO Thomas Kurian told CNBC's Jim Cramer that existing clients are spending "roughly 50% more" than what they originally committed. He pointed to strong AI products and solid sales execution as the reasons.
"Macy's, for example, has found as they deployed our AI system, it's improved the size of the shopping basket that they see," Kurian said. He also mentioned Macquarie Bank saving time by automating workflows.
So the business is clearly working. But here is the catch: to keep up with that demand, Alphabet plans to spend an enormous amount of money on AI infrastructure, and Wall Street is not thrilled about the price tag.
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The Rising Cost of Building for AI
Alphabet's capital projects budget for 2026 is now set at $195 billion to $205 billion. Just three months earlier, the company had projected a narrower range of $180 billion to $190 billion, marking a significant upward revision. During the second quarter alone, the company spent $44.9 billion - mostly on AI infrastructure.
To put that in perspective, before Alphabet's second-quarter report, analysts projected that the tech giants would allocate about $725 billion to AI this year. This figure is expected to increase as other major tech companies release their own earnings reports.
Kurian acknowledged the short-term trade-off. "So for us, when we look at the short term, we're going to rent some capacity for you know a few quarters," he said, referring to outside providers like CoreWeave and Nebius. The idea is to bridge the gap until Alphabet builds enough of its own capacity. "It allows us to bring customers in, bridge them over to when we have sufficient capacity available, and then that will compound over time, and the return on investment makes sense for us."
Investors, however, saw the higher spending forecast and sold. Following the higher capital expenditure outlook, Alphabet's stock fell by over 7% on Thursday.
Kurian defended the company's "very, very disciplined" approach to capital spending, noting that businesses are achieving tangible outcomes from Google's AI offerings.
Despite the stock dip, Alphabet's aggressive spending aligns with a broader industry push. Rivals Microsoft and Amazon are also ramping up AI infrastructure, and the coming earnings reports will provide further insight into whether these heavy investments are starting to pay off.
Next week, quarterly results are due from Amazon, Microsoft, and Meta.
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