Key Points
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Google Cloud has already proven it can make money. What it hasn’t proven is that the money shows up as cash, and that’s the line to check on Oct. 28.
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Alphabet’s capex plan is bigger than what the business generated over the past year.
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The June stock and debt sales covered the gap once; they shouldn’t have to again.
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Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reports third-quarter results on Wednesday, Oct. 28, and most of the attention will focus on the usual places. This includes how fast Google Cloud grew, whether Search held up, and what the capital spending number looks like. But one line matters more than any of them right now, and it sits a few pages deeper in the release: operating cash flow.
In the second quarter, Alphabet spent $44.9 billion on property and equipment and generated $39.1 billion in cash from operations. For the first time in recent memory, the company’s free cash flow was negative, at $5.9 billion. : https://www.sec.gov/Archives/edgar/data/1652044/000165204426000066/googexhibit991q22026.htm That is not a rounding error for a business that generated $24 billion in free cash flow just two quarters earlier. Alphabet covered the gap by raising $49.6 billion in stock and $20.3 billion in debt in June. A company that spent a decade buying back shares has started selling them.
Google Cloud is doing its part
The bull case is that this is temporary, and the second-quarter earnings report gave that case real support. Google Cloud revenue grew 82% to $24.8 billion, and more importantly, cloud operating income more than tripled to $8.8 billion from $2.8 billion a year earlier. That means cloud is now earning roughly $0.36 in operating profit per dollar of revenue, up from about $0.21. Consolidated operating margin expanded two points to 34%.
That is the chain investors need to see hold: cloud growth becomes cloud margin, cloud margin becomes operating income, and operating income becomes cash. In the second quarter, the first two links worked. The third did not.
Operating cash flow actually fell from $45.8 billion in the first quarter to $39.1 billion, even as operating income rose. Part of that was a nearly $7 billion build in inventory, notable for a company that now sells Tensor Processing Unit (TPU) chip systems through its cloud segment, as well as a jump in receivables. Those figures could reverse. But until they do, Alphabet is funding its artificial intelligence build-out with Wall Street’s money, not its own.
What Alphabet needs to show
Management raised full-year capital expenditure guidance to $195 billion to $205 billion on the second-quarter call, up from $180 billion to $190 billion, according to Bloomberg Law. Alphabet generated $185.7 billion in operating cash flow over the trailing 12 months. Read those two numbers together, and the problem is obvious: At the current pace, the company is spending more than it makes, and the equity raise bought it time rather than a solution.
On Oct. 28, the metric to focus on is operating cash flow, and the question is whether it moves back toward the $45 billion to $50 billion range the company produced in late 2025 and early 2026. If it does, the working-capital drag was a blip, the cloud profits are real cash, and the capex budget is self-funding. The stock can keep working. If operating cash flow remains flat or slips again while capex climbs, Alphabet’s AI story will be financed by shareholders, and the market will start pricing it that way.
To me, the cloud results have earned Alphabet some patience, and existing shareholders have little reason to sell ahead of the report. But anyone considering a purchase should wait for the cash flow statement, not the press release headline. One quarter of negative free cash flow is a story. Two would be a trend.
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Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
