Google parent Alphabet continued to grow its business in recent months, but rising spending on artificial intelligence (AI) infrastructure pushed its leftover cash into negative territory. The company recorded negative free cash flow of $5.9bn (£4.3bn) for the first time in at least a decade, according to its past financial records.
Alphabet's spending on AI is now expected to reach as much as $205bn this year, up from $190bn, as major tech companies race to build around a new wave of the technology. At the same time, Alphabet's combined quarterly revenue rose to $119.8bn, an increase of 23% compared with the same period last year. Despite that growth, the company's stock fell 4% in after-hours trading.
Why did free cash flow turn negative?
Alphabet's chief financial officer, Anat Ashkanazi, said on a call with financial analysts that the company posted negative free cash flow because of growing capital expenditures, essentially all of which was related to AI spending. She said the company spent $45bn in the second quarter, with 60% of the cost going toward servers and the remaining 40% going towards data centres.
Alphabet's capital spending was $36bn in the first quarter of this year.
She noted that the company spent $45bn in the second quarter, with 60% of the cost going toward servers and the remaining 40% going towards data centres.
How is Alphabet viewing the AI investment?
Ashkanazi said on the call that when it comes to AI,
"the demand still outpaces that investment". She added,
"As long as we see these attractive opportunities to invest, we will continue to invest."
Google chief executive Sundar Pichai said the shift to AI tools and capabilities still
"feels like early innings in a shift across multiple areas"and said the company's plans for generating financial returns from the spending were
"disciplined".
Pichai also said,
"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."
What does this mean for investors?
The latest results show Alphabet is still growing strongly, but the scale of its AI spending is weighing heavily on cash generation. Investors reacted negatively after hours, even as revenue continued to rise.
- Alphabet's free cash flow was negative $5.9bn (£4.3bn), the first negative reading in at least a decade.
- Alphabet's AI spending is expected to reach as much as $205bn this year, up from $190bn.
- Quarterly revenue reached $119.8bn, up 23% year on year.
- Alphabet spent $45bn in the second quarter, after $36bn in the first quarter.
- Google's stock fell 4% in after-hours trading.
