Alphabet posted negative free cash flow of $5.9 billion in the second quarter, the first time since its 2004 IPO that the company has burned more cash than its operations generated, as capital expenditures doubled to a record $44.9 billion to fund an AI data center buildout that the CFO says will keep growing into 2027. The quarterly deficit is small relative to the sums moving through the business, trailing twelve-month free cash flow remains positive at $53.3 billion, but the inflection is structural: since February, spending has exceeded the cash the business generates, and Alphabet is covering the difference with borrowed money and new stock.
The capex composition has inverted
Approximately 60 percent of the quarter's technical infrastructure investment went into servers, with the remaining 40 percent split across data centers and networking equipment. That ratio inverts the usual assumption that hyperscaler capex is dominated by construction. Most of Alphabet's marginal dollar now buys compute, primarily its own TPU-based systems, rather than buildings. Depreciation of property and equipment rose to $7.1 billion from $5.0 billion a year earlier, and CFO Anat Ashkenazi said infrastructure spending will keep pressuring the income statement through higher depreciation and energy costs. The company remains in what Ashkenazi again called a supply-constrained environment, renting third-party capacity as a bridge while its own data centers come online, an arrangement she said will create modest margin pressure for Cloud in the third quarter. The construction pipeline behind the 40 percent includes a $40 billion, three-campus program in Texas through 2027, the company's largest investment in any state, and a $1.5 billion expansion in Jackson County, Alabama announced in June.
TPU sales turn capex into inventory
Google began recognizing revenue from TPU system sales in the quarter, with Ashkenazi telling analysts the systems were delivered to customer data centers for the first time and that the vast majority of the revenues from these agreements will be realized in 2027. Inventory stood at $10 billion on June 30, roughly four times the $2.4 billion recorded at the end of 2025. A meaningful slice of the quarter's cash outflow bought hardware that sits on the balance sheet today and will be sold to customers next year, bringing cash back in. Money spent on data centers doesn't return in the same manner; it is written down over years of use. Anthropic is anchoring a great deal of external demand, with its October agreement giving the Claude developer access to up to one million TPUs and more than 1 GW of capacity coming online this year. A Broadcom filing added roughly 3.5 GW of TPU capacity from 2027 while locking the co-designer into future generations through 2031. Meta entered talks for multi-billion-dollar TPU deployments last November. The current flagship, the seventh-generation Ironwood TPU, carries 192GB of HBM3E.
The bridge to 2027
Ashkenazi raised full-year capex guidance to between $195 billion and $205 billion, up from $180 billion to $190 billion, and signaled that 2027 spending will increase further. The bet is that TPU sales and Cloud AI revenue will eventually convert this inventory and infrastructure into cash flow at scale. Until then, Alphabet is financing the gap with debt and equity while depreciation eats into reported earnings. The market has priced the AI buildout as a growth story; the test is whether the 2027 revenue inflection arrives on schedule.