Alphabet’s Cloud Is Paying Off—But the Bill for Building It Keeps Growing

Key Points

• Alphabet's earnings per share of $2.12 missed the $3.01 consensus, even as revenue rose 25%.
• Google Cloud revenue surged 103% to $30.7 billion with operating income more than tripling, while capital expenditure more than doubled and free cash flow turned negative.
• Shares fell about 10% in premarket trading after the report, as investors weighed Alphabet's rising AI spending and debt load against the Fed's hawkish rate stance.

Alphabet NASDAQ: GOOGL reported third-quarter results after the close on Wednesday, Oct. 28, just a couple of hours after the Federal Reserve’s latest rate decision. The Fed raised rates in September to 3.75% to 4%, its first hike since 2023, and most policymakers have signaled another increase is likely before year-end. So the Fed holding steady on Wednesday, as markets widely expected, wasn’t the real news.

What stood out was the 10–2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack both pushing for another hike, along with a statement noting that inflation “remains elevated.” That keeps a December hike very much in play.

That backdrop arguably matters more for Alphabet than it might seem. The company has increasingly turned to debt to fund its AI buildout, issuing about $52 billion in senior notes in the first half of 2026 and returning to the bond market in August. Its long-term debt stood at roughly $98 billion as of June 30. Higher rates make borrowing more expensive and raise the return Alphabet’s AI spending ultimately needs to deliver.

Cloud Delivered, Earnings Didn’t

Revenue climbed 25% to $127.6 billion, just shy of the roughly $128 billion analysts expected. Earnings of $2.12 per share fell well short of the $3.01 consensus. An $8.7 billion loss on equity investments cut earnings per share (EPS) by about 55 cents, though results would still have missed expectations without it.

Google Cloud told a very different story. Cloud revenue surged 103% to $30.7 billion, ahead of the $28.7 billion analysts expected, while Cloud operating income more than tripled to $11.1 billion. Backlog rose to $561 billion from $514 billion last quarter, and management now expects to recognize just over 55% of it as revenue over the next 24 months, up from just over 50%.

The spending side was just as striking. Capital expenditure (CapEx) reached $51.4 billion, more than double the year-ago level, while free cash flow was negative $9.1 billion. Beyond CapEx, TPU inventory builds, and a $5.2 billion European Commission fine payment also weighed on that figure.

In Wednesday’s regular session, which also absorbed the Fed decision, GOOGL shares closed up 1.3% at $324.89. Following the report, though, the stock was down about 10% in premarket trading.

Alphabet Sits on Both Sides of the AI Trade

What sets Alphabet apart from most AI spenders is that it both buys and sells AI capacity. On the buying side, the company held its 2026 CapEx guidance at $195 billion to $205 billion. With roughly $132 billion already spent through the third quarter, that implies fourth-quarter CapEx of about $63 billion to $73 billion. Management also said spending will “increase significantly” in 2027, with more details coming on its fourth-quarter call.

On the selling side, TPU system sales contributed meaningfully to Cloud growth. Management said it now has more than 100 significant TPU customers and recently announced a partnership with Oracle NYSE: ORCL to deliver TPU systems. It expects TPU system sales to scale further in the fourth quarter, followed by a meaningful revenue ramp in 2027. For more on the chip suppliers behind those systems, see MarketBeat’s recent coverage of Broadcom NASDAQ: AVGO.

What Supports the Spending, and What Challenges It

The supportive case is that returns are clearly starting to show. Cloud revenue more than doubled, its profit more than tripled, and backlog is not only growing but converting faster. Analysts have been bullish too, with a Buy consensus across 56 analysts and an average price target of $425.04, though that price target has dropped since the earnings report.

That said, costs are climbing fast. CapEx grew even more quickly than Cloud revenue, depreciation is rising as new infrastructure comes online, and management warned that third-party computing capacity coming online in the fourth quarter will pressure Cloud margins in the near term. With free cash flow negative for a second straight quarter and the Fed still leaning toward higher rates, each borrowed dollar arguably has a higher bar to clear.

The Return Is There, But So Is the Cost

Alphabet’s third quarter showed its AI investment is translating into real revenue and profit. The market’s reaction, though, suggests investors are now as focused on what that growth costs to achieve as on how much higher spending could climb in 2027.

Several upcoming markers should help answer that question. The Fed’s Dec. 8–9 meeting will show whether borrowing costs are heading higher still. Alphabet’s fourth-quarter call should bring the first real detail on 2027 spending plans. And the TPU ramp management expects next year will test whether selling AI capacity can help offset the cost of building it. Until then, the debate will likely center less on whether the AI investment is working and more on whether returns can keep pace with the bill.