Key Points
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is a major player in the artificial intelligence (AI) race. It’s the largest of the four hyperscalers, and when it makes a decision, it sends ripples through the industry.
Alphabet CEO Sundar Pichai just made an announcement that will affect chipmakers Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO), and it’s good news — at least for those two companies.
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Following this announcement, Alphabet’s stock slumped, but I think that actually created a better long-term buying opportunity.
Alphabet CEO Sundar Pichai. Image source: Alphabet.
Alphabet continues to raise data center spending guidance
After the closing bell on Wednesday, Alphabet released its Q2 results, and in that report, it hiked its guidance for 2026’s data center capital expenditures.
Alphabet’s initial capital expenditure guidance range for the year was between $175 billion and $185 billion. That range got boosted by $10 billion in conjunction with the Q1 report; now, it has been boosted in the same increment to $195 billion to $205 billion. The picture that this paints is that Alphabet may be publicly offering a forecast for its capex spending, but what’s really going on is that management is basically giving itself a blank check for AI spending if computing capacity becomes available on a quicker timeline than previously expected.
Another item that may worry investors is that Alphabet can no longer cover all this spending with the company’s cash flow. Over the past 12 months, Alphabet generated $186 billion in cash from operations. That means that even if it spent all its cash flow on data centers, that still wouldn’t be enough to cover this year’s build-out. It also has share buyback plans and dividend obligations, so it will have to raise capital to fill this gap, which it has done.
The bulk of this spending is flowing to a handful of suppliers, including Broadcom and Nvidia. Nvidia makes broad-purpose GPUs that are popular options to rent on Google Cloud and other cloud platforms. Broadcom is the design partner behind Alphabet’s custom AI chip, the Tensor Processing Unit (TPU). These are growing in popularity in its data centers, and Alphabet is also starting to sell them to outside customers.
Any time Alphabet raises its capital expenditure guidance, shareholders in these two chip giants should get excited, as that likely signals an increase in their revenues.
Investors in Alphabet were less than pleased with news of its latest capex budget hike, so its stock sold off on the news. I think that was a mistake, too, as Alphabet has proven it can turn the computing resources it is bringing online into immediate profit centers, as evidenced by Google Cloud’s 82% growth rate. While it’s not a popular decision on Wall Street yet, I think Alphabet’s move to spend more on data center platforms is the right one, and positions it strongly for the long term.
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Keithen Drury has positions in Alphabet, Broadcom, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Broadcom, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
