Alphabet Raises 2026 Capex Outlook to $195 Billion-$205 Billion on AI Demand, Easing Chip Peak Fears

Despite Negative Free Cash Flow, Alphabet Says It Will Spend More

Chip Stocks Rise as Samsung Electronics, SK Hynix Gain

Alphabet, Google’s parent, said it will step up capital spending further as demand for artificial intelligence remains strong, helping calm fears that the semiconductor upcycle is peaking.

On its July 22 earnings conference call following second-quarter results, Alphabet said it raised its 2026 capital expenditure forecast to $195 billion-$205 billion from $180 billion-$190 billion.

Chief Financial Officer Anat Ashkenazi said investment in AI infrastructure next year will be “meaningfully higher.” Growth in the cloud business, which sells AI infrastructure to external customers, is helping support that spending. Second-quarter cloud revenue rose 82% from a year earlier to $24.8 billion.

Alphabet will keep investing as long as returns remain attractive, Ashkenazi said. The company is pressing ahead even as free cash flow turns negative. Free cash flow was $10.12 billion in the first quarter and fell to negative $5.85 billion in the second quarter, the first negative reading since Alphabet’s 2004 Nasdaq listing.

Investors viewed Alphabet’s posture with some caution, but saw it as a positive for chipmakers. On July 23, Samsung Electronics closed up 3.65% at 270,000 won, while SK Hynix rose 4.86% to 1.919 million won.

Alphabet CEO Says Conditions Are Better Than a Year Ago

First Free-Cash-Flow Deficit Since 2004 Listing

“Even the most dependable cash generator is now spending more than it earns.”

That was Reuters’ assessment on July 22 after Alphabet reported negative free cash flow of about $5.9 billion in the second quarter, its first such result since listing on Nasdaq in 2004. Free cash flow refers to cash left after a company subtracts essential investment costs such as expansion and maintenance from operating cash flow generated by its core business.

Google and YouTube Still Mint Cash

Alphabet, which owns Google and YouTube, dominates the global online advertising market. Its market position and operating strength have produced hefty margins, allowing it to generate billions of dollars in cash quarter after quarter.

The company still posted strong earnings in the second quarter. Revenue in the segment that includes Search rose 17% from a year earlier to $94.5 billion. YouTube advertising increased 13%, while subscriptions and platforms rose 15%. Total second-quarter revenue climbed 24% to $119.7 billion, exceeding market expectations of $117.2 billion. Operating cash flow from the core business rose 41% from a year earlier to $39.1 billion.

Capital spending increased even faster. Alphabet spent $44.9 billion on capex in the second quarter, more than double the level a year earlier. Most of that went to AI infrastructure such as data centers.

More Spending Needed for AI Infrastructure

Alphabet is fully aware that free cash flow has turned negative, but says it cannot stop. The company’s strategy is to use AI infrastructure investment to accelerate growth across its businesses. As a full-stack company spanning AI infrastructure, models and applications, Alphabet sees a need for more computing resources to defend its market position.

Chief Executive Officer Sundar Pichai said on July 22 that the top priority in resource allocation is AI model development. Building large language models requires more graphics processing units, or GPUs, and more data centers. It also requires spending on tensor processing units, or TPUs, which Google is developing as an alternative to GPUs. Google released three models the previous day, including Gemini 3.6 Flash, but the market still views its most advanced model capabilities as trailing OpenAI and Anthropic.

Infrastructure is also needed for Google Cloud, which rents out AI infrastructure, and for improving ad efficiency in YouTube and Search through AI. Alphabet said it is also reviewing the use of so-called neocloud providers such as Nebius and CoreWeave, which rent out GPUs, until its own infrastructure build-out is complete.

Better Than a Year Ago

Alphabet’s disclosure of a cash shortfall has become a symbol of how committed US Big Tech remains to AI infrastructure spending. Shay Boloor, chief market strategist at Futurum Equities, said Big Tech had once been an asset-light platform model in which revenue grew much faster than investment, but is now shifting to a hybrid model that depends on spending for data centers and AI infrastructure.

It also suggests the AI race among Big Tech is turning into a competition for financing. Alphabet issued $30.5 billion in common stock and $19.1 billion in convertible preferred stock in the second quarter alone. It also raised $24.8 billion through corporate bonds.

Ashkenazi said the company first looked at how much could be funded by cash generated from operations before considering borrowing. That means it turned to outside financing only after deploying available cash. Pichai expressed confidence, saying conditions are better than they were a year ago and that this gives the company confidence to keep investing.

Kim In-yeop, Silicon Valley correspondent, Hankyung.com inside@hankyung.com