Alphabet: A fantastic money machine and spectacular spender
Buying the Kitchen!
The ~5% pre-market dip in Alphabet (GOOGL) shares this morning captures the tension perfectly: Alphabet’s business has never looked stronger, yet its appetite for spending has never been more aggressive. It is a money machine firing on all cylinders, but the just unveiled massive spending plan has shifted the conversation from revenue growth to capital efficiency.
With Google Cloud revenue exploding 48% and total annual revenue crossing the $400 billion mark for the first time, the fundamentals are stellar. However, the $175–$185 billion CapEx guidance for 2026—roughly double its 2025 spend—is a blockbuster figure that makes us wonder if Google is moving from investing for growth to spending for survival.
The bull case points to the company spending from a position of strength and the coast is clear. It isn’t speculative strength. It is feeding a machine that is already yielding massive returns and has built a wide moat.
Cloud acceleration: Google Cloud isn’t just a third-place player anymore. It reached a $70 billion annual run rate with a staggering $240 billion backlog (up 55% from the previous quarter). This backlog provides a massive safety net for the infrastructure spend.
Gemini 3 and the Apple deal: The launch of Gemini 3 and its integration into 2.5 billion Apple devices as the preferred cloud provider for foundation models gives Google a distribution advantage its rivals envy.
Search resilience: Despite the search is dead narrative, Search revenue grew 17%. AI Overviews aren’t cannibalizing Search; they are expanding it by handling longer, more complex queries that previously had no answer.
Custom silicon: Unlike Meta or Microsoft, Google has a decade-long head start in custom silicon (TPUs). Their ability to serve Gemini models at a 78% lower unit cost than last year suggests they are building the most efficient AI factory on the planet.
Yet for all this strength, concerns are emerging whether Google is entering an arms race where the cost of entry is rising faster than the margin for error.
Depreciation drag: The CFO warned that this level of spending will lead to meaningfully higher depreciation expenses in 2026. This could squeeze net income even if revenue continues to climb.
Supply vs. Demand: Sundar Pichai admitted the company remains supply constrained. The $185 billion isn’t just for chips; it’s a desperate grab for power, land, and data center capacity in an increasingly crowded market.
Execution risk: At this scale, the risk shifts from Will people use AI? to Can we build fast enough? Power grid constraints and land availability mean that $185B might not buy as much capacity as it once did.
An Arms Race: Meta and Microsoft are also ramping spend. The figures are just staggering—GOOGL $175-185B; META $115-135B; MSFT $100B+. The concern is that this is no longer a choice, but a requirement to stay in the game, turning AI from a growth engine into a cost of doing business.
It’s going to be fascinating as well as challenging to handicap the developments that lie ahead of Google and others in the trillion+ dollar club.
The “Aha!” moment I see here is realizing that Alphabet is fundamentally changing what it is. For twenty years, Google was a software company with high margins and low physical costs. In 2026, it is becoming an infrastructure company. By outspending everyone, they are betting that the AI era will be won by whoever owns the physical layer of the internet. The 3% dip today is the sound of the market adjusting to a lower-margin, higher-moat business model.
Alphabet (GOOGL) and the others are not biting off more than they can chew; they are simply buying the entire kitchen to ensure no one else can cook.