Alphabet Is Raising $80 Billion From Stock Sales -- Here's the Most Important Question Investors Should Ask

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) turned heads when it announced plans to raise $80 billion in capital by issuing new equity. The plans include a $10 billion private placement with Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB), $15 billion in convertible preferred stock, $15 billion in public issuance, and a $40 billion authorization to sell stock over time at the market price, starting in the second half of 2026.

Investors may be wondering why Alphabet would choose to dilute its shares this way. Management has spent years buying back its stock, more than offsetting the stock-based compensation it provides to employees. They may also be wondering why it would choose to use equity to raise capital. Alphabet already raised more than $85 billion over the past year by selling debt, but given its sizable asset base, it could easily issue more debt.

But the real question investors need to ask is fairly simple: Will Alphabet use the capital it raises to generate more economic value than existing shareholders ceded in ownership? In other words, will the additional $80 billion meaningfully grow the pie at Alphabet?

Image source: Getty Images.

Accelerating the build-out of a once-in-a-generation opportunity

There are really two parts to Alphabet's equity raise: About $50 billion will go toward artificial intelligence infrastructure, and the other $30 billion will go toward paying taxes related to vesting equity awards. Investors can think of the latter as additional stock-based compensation.

I contend that both have the potential to produce excellent value, and the acceleration in spending is well worth it.

Management recently shared plans to spend between $180 billion and $190 billion on capital expenditures this year, mostly on its AI build-out. That was a slight step up from its prior guidance of $175 billion to $185 billion. What's more, management said, "We expect our 2027 capex to significantly increase compared to 2026."

Management has good reason to invest as much as possible in building data center capacity right now. Google Cloud's revenue growth accelerated to 63% last quarter as its top line reached $20 billion, and that growth was driven by additional capacity coming online. Even as Alphabet reported higher revenue for its cloud computing business, its backlog doubled sequentially to $462 billion, with expectations of recognizing 50% of that over the next 24 months.

Alphabet plans to add another $50 billion to its capex budget via this equity sale, which could be seen as a sign that management is confident in its ability to generate strong returns on invested capital via its cloud computing business.

Using stock to retain top talent

The $30 billion to cover employee taxes on stock-based compensation can be seen in part as an investment in retaining top engineering talent. Alphabet's progress in hardware design (its custom Tensor Processing Units), large language model development (the Gemini family), and the use of its models to enhance its core products (search and advertising) may be overshadowed by the growth of Google Cloud. But investors shouldn't overlook it.

The TPU business has been a key attraction for Google Cloud, with these AI accelerator chips offering better price performance than standard GPUs on many AI tasks. Management said it's starting to sell the chips directly to other companies for use in their own data centers, including a recent deal with Anthropic. The stand-alone chip business could be another growth driver for Alphabet.

The growth rate of Google Search revenue accelerated to 19% on the strength of higher engagement and better ad targeting. Search has seen improving engagement thanks to AI Overviews and AI Mode, which provide AI-generated answers to user queries. Advertising has gotten a boost from a better understanding of search intent and new generative AI advertising features, making ad creatives more effective.

Overall, Alphabet looks poised to answer the question posed at the top of this article in the affirmative. That's excellent news for current shareholders, and the long-term returns could be even better.

While the company is likely to experience negative free cash flow as it pours money into building massive AI data center capacity, it should return to generating large cash flows in the near future. The company could experience a dilution of 2% on earnings per share this year, possibly less, due to its use of convertible shares. When free cash flow returns to being positive, however, investors should expect management to go back to repurchasing stock in short order, which will ultimately increase shareholders' stakes in the business.

Consider that Berkshire Hathaway, which takes a long-term view of businesses, sees good value in Alphabet at around $350 per share. Investors should take advantage of the recent share price pullback amid dilution fears to buy the stock at a price close to that level.

Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Berkshire Hathaway. The Motley Fool has a disclosure policy.