Like other hyperscalers, Alphabet (GOOG +0.87%)(GOOGL +0.97%) has ramped up its spending to build artificial intelligence (AI) infrastructure. It reported $80.6 billion in capital expenditures over the first half of 2026, and it's guiding for $195 billion to $205 billion of capex total this year.
The main concern for investors is whether all this spending will lead to enough growth in profits. Recent numbers for Google Cloud indicate that the company's capex is starting to pay off.
Image source: The Motley Fool.
Google Cloud just had its best quarter ever
Alphabet is investing heavily in data centers, but it's also benefiting from rising demand for AI infrastructure. Google Cloud revenue increased 82% year over year to $24.8 billion in second-quarter 2026. The revenue set a new record for Google Cloud and topped Wall Street expectations of $22.5 billion.
For comparison, that was faster growth than the two other top cloud providers, Amazon and Microsoft. Amazon Web Services revenue increased 37% year over year in Q2 2026, and Microsoft Cloud revenue increased 26%.
Crucially, Google Cloud isn't just making more money. It's also getting much more profitable. Operating income more than tripled year over year, from $2.8 billion to $8.8 billion, and the segment's operating margin went from 20.7% a year ago to 35.6%. Profitability is growing even faster than sales, indicating that Alphabet's AI spending could be money well spent.
NASDAQ: GOOGL
Key Data Points
Google Cloud also has a massive backlog of $514 billion, up from $106 billion a year ago, and management expects half of the backlog to become revenue within 24 months. The constraint is supply, as the CFO has said that demand is outpacing the company's AI investments. Given the size of its backlog, Google Cloud will likely continue to see significant sales growth.
The downside of Alphabet's hefty capex
Alphabet's AI spending has its risks. The company's free cash flow plummeted to negative $5.9 billion in Q2 2026, down from $10.1 billion in the first quarter and the first negative quarter since Alphabet went public in 2004. Debt has ballooned to $98.2 billion, up from $23.6 billion last year. Alphabet has also indicated that it may tap equity through an at-the-market program, which would dilute shareholders.
Alphabet is a highly profitable business, but it's spending more than its operating cash flow and taking on debt to build more compute. If the AI boom slows down, or if an economic downturn leads companies to tighten their budgets, Alphabet could end up in a position where its expensive AI bet doesn't deliver enough sales growth to be worthwhile.
What to watch going forward
Although Alphabet's capex continues to rise, it's spending to meet substantial demand and a $514 billion backlog. This type of spending is also part of remaining competitive with other hyperscalers -- Amazon, Microsoft, and Meta Platforms are all investing heavily in data centers, as well.
Alphabet is expected to report its third-quarter 2026 earnings toward the end of October, which will provide valuable information on the profitability of its AI spending. Google Cloud revenue, operating income, and backlog are all worth monitoring. I consider Alphabet one of the best AI investments available right now, and if profit margins and its Google Cloud backlog continue to impress, that will reinforce its value.
