Alphabet Spent $45 Billion on Artificial Intelligence Last Quarter, and It Already Plans to Spend $811 Billion More

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has some investors worried about how much it's spending on artificial intelligence (AI). In its second-quarter report, the company said it had negative free cash flow for the first time since going public way back in 2004, after spending $45 billion on capital expenditures last quarter. That's double what it spent a year ago, and it plans to spend even more over the next few years.

Management raised its full-year 2026 capital expenditure budget to between $195 billion and $205 billion alongside the earnings release. It also said capex will "increase significantly in 2027." In fact, a brief note in the company's 10-Q filing with the SEC revealed that it's already committed to spending another $811 billion, mostly on artificial intelligence.

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Alphabet's going all-in on AI

While it won't show up on the company's balance sheet, Alphabet disclosed that it had entered into purchase commitments and other contractual obligations totaling $811 billion as of the end of the second quarter. That's a huge increase from the $332 billion in commitments it had signed at the end of the first quarter.

These long-term supply agreements help it secure its chip supply, data center construction, and energy services. It may secure a guaranteed supply or favorable rates to lock in these take-or-pay contracts years into the future. The company said it expects to generally fulfill all of its agreements by 2030, while the energy service agreements range from two years to 26 years, with obligations through 2054. As such, investors can expect massive capital expenditures through at least 2030, with energy contracts in place to serve its growing portfolio of data centers for decades to come.

It's a huge bet on the continued demand for AI compute. Management has good reason to make that bet confidently. It saw its remaining performance obligations climb to $520 billion as of the end of June. On top of that, Alphabet says it's facing a severe shortage of compute capacity as it takes on massive, multi-year deals. As a result, it's planning to increase its capacity through third-party providers as a bridge until it can build out more capacity. While that will result in a short-term margin hit, the long-term benefits outweigh the cost.

Additionally, Alphabet is ramping up the direct sales of its custom Tensor Processing Unit (TPU) systems. That requires additional commitments to its chip design partners to ramp up sales in 2027 and beyond. Its inventory notably jumped from $2.4 billion to $10 billion last quarter, and the potential sales of TPUs could be another significant driver of its long-term supply agreements.

While some investors may balk at the $811 billion headline figure, Alphabet is positioning itself to capitalize on the massive opportunity ahead. While it will weigh on its cash flow over the next few years, the core operations remain cash cows, and the cloud business is producing very strong returns on invested capital.

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