For 2026, Alphabet (GOOG -0.80%) (GOOGL -0.94%) management projected the tech giant would spend $175 billion to $185 billion on capital expenditures, mostly for data centers. That turned out to be a bad estimate, as Alphabet has raised its guidance range each quarter and now expects to spend between $195 billion and $205 billion this year.
The market may see rising spending plans as a red flag, but I don't see it that way. If you look at Alphabet's latest results, one metric shows that this spending is well worth it, and Alphabet is likely making the right move by increasing it.
But what does that mean for investors? Let's take a look.
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Alphabet is approaching the AI arms race from two directions
Alphabet hasn't placed all of its chips on one bet in the artificial intelligence (AI) world. Instead, it has spread them out. It has bet on itself to develop strong AI models and applications internally, and has used some of its computing capacity to pursue that goal. However, it has also built up its cloud computing division, allowing other AI firms to build and create competing models to Alphabet's own. Regardless of which bet works out (they both may be smart moves), Alphabet is assured it will make money from this generational shift.
The primary way this is showing up in Alphabet's financials right now is in its cloud computing division, Google Cloud. During the second quarter, Google Cloud's revenue rose at a jaw-dropping 82% pace, posting an impressive 36% operating margin. That kind of growth blows away all the competition, and with Alphabet increasing its capital expenditure guidance, it shows there's a lot more demand to meet.
NASDAQ: GOOGL
Key Data Points
This bodes well for Alphabet's future, as cloud computing is less dependent on the economic cycle than its advertising business is. By diversifying Alphabet away from ads, it's becoming a more balanced company. Additionally, with AI and computing demand growing far faster than the advertising market, Alphabet is investing heavily where it sees the highest growth potential, a smart move by management.
With Alphabet making smart moves by investing in the fastest-growing sector around, I think it's a great stock to buy. It may take several years for Alphabet's cash-generating state to return, as it has already indicated that 2027 spending will be far higher than in 2026. But I think the long-term benefit of building out a sprawling cloud computing network will far outweigh the costs.
Alphabet is a top AI winner to buy a stake in now. Even if you've missed out on it so far, now is not too late to reverse course and take a position.
