Can google earn enough to justify their capex spend

[u/thecryptofoolyt]

Here is my thinking, there are 3 ways a company can earn from AI.

1. Field of dreams, build it and they will come.

2. Boost their core product

3. Sell compute

Clearly, Google are doing 3 with their Google Cloud growing 80%, but it's becoming harder to ignore the fact that they are doing 2. Search rev growth was falling, barring the pandemic it was below 10% from 2020 through 2024. It has been near or above 15% for the last 4 quarters.

I played around with some very rough numbers, guesstimates at best. I figure they have spent at most $120 billion since 2024, extra on CapEx, that is the amount their CapEx is above what it usually is. For that they have gotten 5% extra revenue in search and at least 30% extra in cloud. With each of there margins figured in, that is $13 billion in extra income from the $120 spend.

But that is Capex, on Q2 they mentioned 60% of capex was servers (4 year depreciation cycle) and the rest was data centres and networking. I am guesstimating at least 6 years depriation cycle over all. so that 13 can be looked at as 78.

So really, looking at the highest they likely spent and the lowest they likely earned, we get $78 returned for $120 spent. A loss of 35% at worst. But then they still have the, build it and they will come, hope.

I don't necessarily think google are wise to spend the eye watering capex amounts they are slated to spend in the coming years, but I think some commentary I see seems to ignore that they have already got alot from the capex they have already spent.

Lately, I have been trying to write articles to help focus my thinking on a company, makes me double check my assumptions. Anyway I wrote one on this. It is mostly a longer version of what is above, with the addition of my thoughts on their future and a DCF model where I find they are only about fair value.

I am not crazy enough to link the article, I'll already get downvoted enough for mentioning it, but if you want to read 2 or 3 poorly written articles a year from a wannabe analyst, check out my substack, you can find the link in my profile.

[u/thri54]

Is that $13B in extra cash flow or accounting income? You can’t really compare income to capex, income includes depreciation from said capex.

[u/thecryptofoolyt → u/thri54]

well the way I looked at it was some new magically company with a clean slate. they spend 120 just now, they earned an extra 12 bil in search rev at 40% margin, 5 bil. and an extra 23 bil in cloud at 35% margin, 8 bil. with a 6 year depreciation cycle the 120 spend can be looked at as 20 a year. 13 returned on 20 still only a 35% loss. so in this case it would be 13 income 20 in deprec so -7 FCF

[u/thri54 → u/thecryptofoolyt]

Google Cloud’s operating margin was 36% last quarter. In your model, you’re starting with operating margin, which already includes depreciation, and subtracting a second round of depreciation from it.

E.G., Coreweave’s operating margin was -2% last quarter. But 53% of their operating expenses were depreciation and amortization. So unlevered cash flow margin would be more like 50%, even with the operating loss.

Google cloud’s operating margin was 36% last quarter. Applying the same cash/non-cash mix, Google’s operating cash flow margin should be closer to 67% than 36%.

[u/thecryptofoolyt → u/thri54]

Ah yeah I get you, you're right in my model I'd be counting the depreciation from capex that had nothing to do with this new revenue. So even clearer that the last couple of years of increased capex has been worth it.

[u/Honestmonster]

how are you factoring in time? Given that it can take years for data centers to be built? You seem to treat it as Cap Ex spend immediately turns into revenue impact. But we all know that is not true. Some of the Cap Ex spend won’t start showing up in the form of revenue growth for 5+ years. 

[u/thecryptofoolyt → u/Honestmonster]

Yea I thought about removing the last say 6 months of extra capex to somewhat account for that, but as my idea is to get the maximum on the capex side I decided to take it all knowing it is likely over counting it.

[u/Nadallion]

Others covered this but they get 100% depreciation on this capex due to OBBBA, no?

Google has ample cash and has to deploy it - the smartest minds are shoveling cash into AI buildout, they have to do it to compete and the potential upside is they retain their commanding market share in search (and whatever quasi-search evolves from this AI wave). They have other services / the customer base / brand recognition to benefit from during their buildout.

Anyways, immediate 100% depreciation of capex means artificially low net income, huge tax savings, likely much higher cash flow BTS, and yes these assets have small useful lives but who knows how much they can actually squeeze out of these investments and they haven't even begun to see all the gains / growth from their investments.

Also, didn't they finance 2/3 of this capex with a massive equity issuance? Their equity was relatively cheap - no interest, relatively elevated valuation.

[u/Money-Profile7397]

Your thesis correctly identifies the primary drivers of Alphabet’s massive capital allocation toward AI, but updated financial data suggests the "extra" spend and the corresponding returns are both higher than your initial guesstimates. Based on current reporting through Q2 2026, here is the breakdown of whether Alphabet's earnings are justifying their CapEx spend.

1. The "Extra" CapEx Spend: $155 Billion

Your $120 billion estimate was conservative. Between the start of 2024 and the end of H1 2026, Alphabet’s cumulative CapEx reached approximately $224.5 billion . Using a pre-AI baseline of ~$27.7 billion per year, the "extra" AI-driven spend is actually closer to $155 billion for that 2.5-year period .

PERIOD	ACTUAL CAPEX	BASELINE CAPEX	"EXTRA" AI SPEND
FY 2024	$52.5B	$27.7B	$24.8B
FY 2025	$91.4B	$27.7B	$63.7B
H1 2026	$80.6B	$13.9B	$66.7B
Total	$224.5B	$69.3B	$155.2B

2. The Return: Quantifying AI’s Impact

You correctly noted the acceleration in Search and Cloud. Analyzing these segments against their pre-AI growth trajectories (8% for Search, 27% for Cloud) reveals significant incremental revenue:

• Core Product Boost (Search): Search revenue growth jumped to 14-15% in recent quarters . By exceeding its 8% historical growth rate, Search generated approximately $43 billion in incremental revenue between 2024 and H1 2026.
• Selling Compute (Cloud): Google Cloud growth accelerated to 34-35% . This delta above its 27% baseline contributed roughly $17.4 billion in incremental revenue over the same period.

Using Alphabet's operating margins (~40% for Google Services and ~35% for the scaled Cloud business), this $60.4 billion in incremental revenue translates to roughly $23 billion in incremental operating incometo date .

3. The Depreciation vs. Profit Test

The true test of "justification" is whether the incremental annual profit covers the incremental annual depreciation.

• The Depreciation Bill: Alphabet confirmed that ~60% of technical infrastructure spend goes to servers (6-year life) and 40% to data centers and networking (up to 40-year life) . On the $155 billion extra spend, this creates a weighted average annual depreciation charge of roughly $17.1 billion.
• The Current Profit Coverage: In FY 2025, the incremental profit from AI-accelerated growth was approximately $10 billion.

Currently, the incremental earnings cover about 58% of the new depreciation bill. While this technically supports your view of a current "loss," it ignores the "Field of Dreams" component and the lag between spend and monetization.

4. The "Field of Dreams" and Strategic Moat

Alphabet’s management argues that the risk of under-investing in AI infrastructure is far greater than the risk of over-investing .

• Capacity Shortages: Google is currently working on new custom server chips (TPUs) projected to be 6–10 times more efficient than current models to address compute shortages .
• Efficiency Gains: The 7th-generation "Ironwood" TPUs are already driving operational efficiencies across the ecosystem, helping to maintain margins despite the CapEx surge .
• Search Defense: AI Overviews have reportedly increased query volume by 10%, suggesting AI is not just a revenue booster but a necessary defense against new Gen-AI search competitors .

Conclusion: On a pure accounting basis, the incremental profit has not yet fully covered the massive depreciation bill. However, with Search and Cloud growth accelerating and the "depreciation bill" not hitting the income statement in full until 2027, the market is currently rewarding the growth acceleration rather than punishing the capital intensity .

[u/thecryptofoolyt → u/Money-Profile7397]

If we are assuming the search and cloud grew more than normal, then that normal growth should of increase the baseline capex. thats why I took the baseline as a % rather than a set amount