Alphabet's AI spending now exceeds its operating cash, and borrowing fills the gap

A year ago, Alphabet's spending on servers and data centres used about half of the cash its operations produced, and the company was buying back its own shares. In the September 2026 quarter it spent $51.4 billion on property and equipment, more than the $42.3 billion its operations brought in. Free cash flow, the cash left after that spending, was negative $9.1 billion, and the quarter before was negative too.

Part of the shortfall was a one-off: operating cash flow carried a payment for a European Commission fine once the appeal ended. It also absorbed a build-up of inventory for TPU systems, the AI chips and servers Alphabet has started selling to outside customers, and management expects that build-up to keep weighing on free cash flow as the business grows. Anat Ashkenazi, the chief financial officer, said: "Our sizable investments in technical infrastructure and inventory build of TPU systems as we scale that business will put pressure on free cash flows." Management said it buys the components only once a customer contract is signed. Alphabet kept its guidance for this year's capital spending at $195 billion to $205 billion and repeated that spending will rise significantly in 2027, with details due alongside its fourth-quarter results. After what it spent in the first nine months, the bottom of that range implies at least $63 billion in the fourth quarter, calculated from the reported figures, more than last quarter.

The money to close the gap now comes mostly from lenders. Last quarter Alphabet raised $29.0 billion from bonds and $12.4 billion from new shares and repurchased none of its stock. A year earlier it borrowed less than a quarter as much, sold no shares and was buying back its stock. The shares sold last quarter came through an at-the-market programme, a facility for selling stock gradually into the market; in July management said it did not plan further equity raises beyond those sales, which cover tax on employees' share awards. The larger equity raise came in the first half: $49.6 billion of common and convertible preferred shares, calculated from the cash flow statement. Long-term debt stood at $125.1 billion at the end of the quarter, against $21.6 billion a year before.

This is not a company short of cash. At the quarter's close it held $265.1 billion of cash and marketable securities, though $90.4 billion of that is shares in other companies, holdings that lost value during the quarter. It raised far more than the quarter's cash shortfall, and the results describe the new notes only as being for general corporate purposes. What the borrowing does change is the holder's position: more debt ahead of the shares, and more shares sharing the profit.

The demand behind the spending shows up in Google Cloud. Its revenue rose 103% from a year earlier, and its operating income grew by enough to account for about 80% of the rise in Alphabet's operating income, calculated from the segment figures. Cloud's operating margin, its operating income as a share of revenue, reached 36.2%, up from a year earlier. Contracted revenue not yet booked, the backlog, stood at $561 billion.

That margin is harder to read than it looks. The company said TPU system sales, which are hardware, contributed meaningfully to Cloud's growth, but it gives no revenue or margin for them; asked by analysts, the chief financial officer said Alphabet does not report financials product by product. Nor did last quarter carry much cost from the computing capacity Alphabet is renting from other providers to ease its shortage, because that capacity was switched on only in the quarter's final days. Management expects it to weigh on Cloud margins in the near term as use of it rises in the fourth quarter.

Alphabet has also signed up to $924 billion of future purchase commitments, multiyear agreements to secure capacity for technical infrastructure and inventory, which the company describes as maximum amounts, some with flexible pricing and volume. Operating income is rising, and Cloud's growth suggests the customers are there. What has changed is who pays for the build while it is under way: borrowed money now covers part of it, and next year's spending figure, due with the fourth-quarter results, will show how much more that part grows.