Google parent Alphabet posted its first negative free cash flow in at least a decade on Wednesday, as the tech giant’s breakneck spending on artificial intelligence infrastructure burned through $5.9bn (£4.3bn) more than it generated in the second quarter.
The disclosure came as part of a quarterly earnings report that showed revenue soaring 23% to $119.8bn, yet investors fixated on the cost of the AI arms race. Alphabet shares fell 4% in after-hours trading.
“Google parent Alphabet posts first negative free cash flow in a decade as AI spending hits $205bn.”
Anat Ashkanazi, Google’s chief financial officer, told analysts on a conference call that the negative free cash flow was driven by “growing capital expenditures, essentially all of which is related to AI spending.” She said the company spent $45bn in the second quarter alone, with 60% going to servers and the remaining 40% to data centres. That followed $36bn in capital spending in the first quarter.
Alphabet now expects total AI-related investment to hit as much as $205bn this year, up from an earlier forecast of $190bn. “The demand still outpaces that investment,” Ashkanazi said. “As long as we see these attractive opportunities to invest, we will continue to invest.”
Chief executive Sundar Pichai described the technological shift as “early innings in a shift across multiple areas” and insisted the company’s approach to generating returns was “disciplined.” He added: “What I see with what you can do with frontier capabilities, there is still a lot of work left to do to translate that into experiences for our users. So that looks like extraordinary opportunities with extraordinary returns.”
Rachel Winter, a partner at wealth management firm Killik & Co, said there was “a bit of surprise among investors about how much Google was spending.” She noted: “They said that this year the total they will spend will be between $195bn and $205bn. So these are huge numbers. And I think the fact that the shares dropped about 3.5% in after-hours trading when the results came out, that suggests there is a little bit of concern about those levels.”
Tesla, the electric vehicle company controlled by Elon Musk, also reported negative free cash flow on Wednesday of $1.1bn for the second quarter due to its own rising investment costs. It was Tesla’s first negative showing of leftover cash in two years.
For Alphabet, the question is whether the billions poured into AI can generate the kind of returns that justify the spending. When even the CFO acknowledges demand exceeds investment, the pressure to deliver is immense.