Google's AI spending pushes free cash flow into the red

Google's parent company, Alphabet, reported its first negative free cash flow in at least a decade after significantly increasing spending on artificial intelligence infrastructure, even as quarterly revenue continued to climb. The company said it plans to invest even more in AI this year, arguing that demand for the technology still exceeds its current capacity.

Alphabet reported quarterly revenue of $119.8 billion, up 23% from the same period last year. However, free cash flow fell to negative $5.9 billion, reflecting the company's heavy investment in AI-related infrastructure. Investors appeared concerned by the higher spending, sending Alphabet shares down about 4% in after-hours trading.

AI investment accelerates

Chief Financial Officer Anat Ashkanazi said the decline in free cash flow was driven almost entirely by increased capital expenditure on AI. Alphabet spent $45 billion during the second quarter, with around 60% allocated to servers and the remaining 40% invested in data centres.

The company has now increased its projected AI investment for the year to between $195 billion and $205 billion, up from an earlier forecast of $190 billion.

Ashkanazi told analysts that demand for AI services continues to outpace the company's investment, adding that Alphabet intends to keep spending as long as attractive opportunities remain.

Google sees long-term opportunity

Chief executive Sundar Pichai described the shift towards AI as still being in its early stages, saying there is significant work ahead to turn the technology's most advanced capabilities into products for consumers.

He added that Alphabet remains disciplined in its investment strategy and believes the spending will generate strong long-term returns as AI becomes more deeply integrated across its services.

Market analysts said investors were encouraged by Alphabet's strong revenue growth but remained cautious about the scale of its spending. Rachel Winter, a partner at wealth management firm Killik & Co, said the planned investment figures were higher than many expected, which likely contributed to the decline in the company's share price.

Alphabet was not the only technology company reporting pressure from increased investment. Tesla also posted negative free cash flow of $1.1 billion during the second quarter after stepping up spending on future growth projects. The electric vehicle maker said it expects capital expenditure to reach $25 billion this year, while its shares also fell around 4% in after-hours trading.