Alphabet is Raising $84.75 Billion to Win the AI Wars. Should Investors Celebrate or Worry?

Tech giant and Google parent company Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) has spent billions of dollars buying back its stock over the past decade. But Alphabet is reversing course in a big way, announcing a massive $84.75 billion equity offering earlier this month.

In other words, Alphabet is selling new shares of stock to raise capital to fund its artificial intelligence (AI) investments. Alphabet has primarily funded its AI spending over the past several years with cash flow. Now, the company is pulling out the stops to win the AI war it's waging with other hyperscalers, including OpenAI and Anthropic. Alphabet plans to spend $180 billion to $190 billion this year alone.

However, it's not clear right now whether that's something investors should celebrate or fear. The AI equity raise could have two implications for Alphabet stock.

Image source: The Motley Fool

1. Alphabet is seeing AI's early returns and leaning in

The AI boom really began to pick up steam in 2023, and you can see how Alphabet's capital expenditures have continued to grow since then. The company developed its Gemini AI models, launched an app to compete with ChatGPT, and integrated Gemini AI across Google Search and other products and services.

At this point, Alphabet seems to be seeing positive returns from AI across its business. AI has boosted its cloud computing business, helped Waymo grow, and is enabling Google Search to remain relevant in the AI era.

GOOGL Capital Expenditures (TTM) data by YCharts

Additionally, Alphabet reached an agreement with Apple earlier this year to power its next-generation frontier AI models with Gemini. There are roughly 2.5 billion active iOS devices worldwide, so this is a massive lift that naturally will require more AI infrastructure to support it. So, the positive angle here is that Alphabet can justify this AI spending with years of growth ahead.

2. Investors are now paying Alphabet's AI bill

The unfortunate aspect of this is the shift in funding strategy. It's one thing to use cash profits to build out AI, but the equity raise means that existing shareholders will see their stock diluted. To be fair, the near-term dilution is relatively minor. The $84.75 billion equity raise only represents about 2% of Alphabet's current $4.3 trillion market cap.

Alphabet's balance sheet leverage is only 0.33 times its EBITDA (earnings before interest, taxes, depreciation, and amortization), so the company could easily afford to take on that debt. But it could be that management felt a 2% dilution was cheaper than paying interest on that debt.

Investors probably don't want to see Alphabet make this a long-term habit, as those raises could add up to significant dilution over the years. Remember, issuing new shares also means the company is paying dividends on those shares. That said, this equity raise should raise no red flags right now, since the upside AI offers is too great an opportunity to pass up.

Justin Pope has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy.