Google Profits
Google's push to stay ahead in AI comes with a bill that would make even a wealthy government flinch.

Google shares plunged in New York on Thursday after parent company Alphabet reported its first-ever negative free cash flow as a public firm, despite posting a record quarterly profit of $112 billion fuelled largely by paper gains on its investments in other tech and AI companies.

The shock figures, released in Alphabet's latest earnings report, have sharpened questions over how much of Google's AI boom is built on solid ground and how much is riding on a frothy market that could yet deflate.

Alphabet has increasingly been treated as a bellwether for the artificial intelligence trade, a sort of proxy for market enthusiasm about the technology. Investors have piled into the stock over the past year on the expectation that Google's search engine, cloud business and experimental AI products would translate into durable, cash-generating growth.

The latest report appears to confirm one half of that story tech's AI champions are making extraordinary sums on paper while undercutting the other, more old-fashioned half, that those gains are grounded in reliable cash and clear demand.

Record Profit at Google Built on AI Bets Elsewhere

Alphabet's headline numbers barely sounded real. According to the report, quarterly profits jumped to $112 billion, more than four times the roughly $25 billion it made over the same period a year earlier. Any other year, that kind of leap would have sent Google's stock soaring.

Look closer and the picture changes. It reported that $99 billion of that haul did not come from selling advertising, cloud services, or even new AI products. Instead, it was almost entirely the result of Alphabet's own investment portfolio, particularly stakes in other technology firms that are also betting heavily on AI.

Alphabet pointed to holdings in companies such as Elon Musk's SpaceX and Anthropic, the developer behind the Claude chatbot, as key drivers of the windfall. In effect, Google made colossal profits from the same AI-driven exuberance that has pushed valuations of those firms dramatically higher.

In an earnings statement, Alphabet chief executive Sundar Pichai struck a bullish tone, insisting Google's 'AI investments are redefining what's possible across every part of our business.' On one level, that is clearly true: the company is now entangled in almost every meaningful strand of the AI economy, from chips and data centres to frontier models.

On another, it underlines just how circular some of the current gains look. Alphabet is profiting handsomely from an AI boom it is helping to fuel, not necessarily from selling finished AI products at scale.

Google's Negative Cash Flow Highlights Strain of AI Spending

Beneath the profit headline, the numbers get more uncomfortable. Google's push to stay ahead in AI comes with a bill that would make even a wealthy government flinch. Alphabet raised its forecast for capital expenditure in 2026 from a previous range of $180–$190 billion to an astonishing $195–$205 billion.

The rationale is that it must spend aggressively on computing infrastructure now to break through capacity bottlenecks and capture even greater profits later. That is the standard Silicon Valley story: sacrifice cash today for dominance tomorrow. But this time, the tab is exceptional even by big tech standards.

Gizmodo reported that Alphabet's new chief financial officer, Anat Ashkenazi, went further, warning investors that capital spending is expected to 'increase significantly in 2027.' Nothing in the earnings materials explains in granular detail how much of that future spend is tied directly to revenue-generating products, and how much is effectively an arms race for processing power.

The immediate impact is already visible. Alphabet recorded a negative free cash flow for the quarter, the first time that has happened since it became a public company. Free cash flow is the money left after paying operating costs and capital expenditures. Falling below zero means the firm's day-to-day operations, combined with its current investment plans, are not self-funding.

Google
Google

That alone would be enough to make cautious investors twitchy. Couple it with the fact that so much of the quarter's profit came from investment gains that could evaporate if AI valuations retreat, and the unease becomes easier to understand.

On Thursday, the market delivered its verdict. Alphabet's share price sank by 6.89 percent in a single session. For a company of Google's size, that represents tens of billions of dollars of value erased overnight. It may also indicate that investors, who were happy to overlook eye-watering AI spending last year, are starting to demand clearer proof that these investments will turn into stable, cash-backed returns rather than volatile balance-sheet victories.

None of this means an AI crash is inevitable, nor that Google's strategy is doomed. It does, however, expose how tightly interwoven the company's fortunes have become with the broader AI trade. When Alphabet's profit line is driven so heavily by its stakes in other AI hopefuls, and when those same profits sit alongside its first negative free cash flow, the story starts to look less like effortless domination and more like a very expensive gamble.

The headline remains dazzling: Google is making more money than almost any private company in history. The footnotes tell a more fragile story, one in which a single turn in AI sentiment could make those billions look a lot less solid than they do on the earnings slide.

Originally published on IBTimes UK