Alphabet Inc. (NASDAQ:GOOGL) shares tumbled more than 7% after the tech giant reported second-quarter earnings that missed Wall Street’s profit expectations and posted its first-ever negative free cash flow since going public in 2004. The stock drop left CNBC personality Jim Cramer stunned, saying the market’s reaction “unraveled the entire trade” around AI spending.finance.yahoo+2
Earnings Beat Revenue, Miss Profit
Alphabet reported second-quarter revenue of $119.8 billion, beating analyst estimates of $116.93 billion. However, adjusted earnings per share came in at $2.85, slightly below the $2.89 expected by analysts.finance.yahoo
The company also raised its 2026 capital expenditure guidance to a range of $195 billion to $205 billion, up from the prior estimate of $180 billion to $190 billion. This increase in planned spending on AI infrastructure and data centers contributed to investor concerns about profitability and return on investment.finance.yahoo+1
First Negative Free Cash Flow Since IPO
The most alarming figure for many investors was Alphabet’s free cash flow, which turned negative $5.9 billion during the quarter. This marked the first time the company has reported negative free cash flow since its initial public offering in 2004.finance.yahoo+2
Capital expenditures for the quarter hit a record $44.9 billion, driven by heavy investments in AI infrastructure, custom Tensor Processing Unit (TPU) chips, and data center construction. Operating cash flow of $39.1 billion was not enough to cover the massive spending.note+1
Despite the quarterly burn, Alphabet’s trailing twelve-month free cash flow remained positive at $53.3 billion, and the company ended the quarter with $242.5 billion in cash and marketable securities.x+1
Cramer’s Reaction: “We Don’t Believe Anymore”
On his show, Cramer expressed shock at the market’s harsh response to Alphabet’s earnings. He noted that the company lost approximately $255 billion in market capitalization simply for raising its spending guidance.cnbc
“But what I was most shocked by was what happened with Alphabet,” Cramer said. “Last week, Alphabet unraveled the entire trade.”cnbc
He pointed out the disconnect between strong cloud growth and investor skepticism about AI returns. “Google Cloud is doing great. Just great. So you have to say, well that works. But the other side, the actual compute, that you’re selling say to others, or that you’re using, we haven’t figured out the return on that yet.”cnbc
Cramer concluded that without clear evidence of ROI on AI spending, he would look elsewhere in tech. “If there’s not a return, I’m sorry, I’m not going to buy this stock. I’m going to find something else that works in tech.”cnbc
Google Cloud Surges 82%
Despite the negative sentiment, Alphabet’s Google Cloud division delivered stellar results. Revenue from Google Cloud jumped 82% year over year to $24.8 billion, far exceeding analyst expectations of roughly $22.5 billion.finance.yahoo+2
Cloud operating income more than tripled to $8.8 billion during the quarter. The division also reported a backlog of contracted work totaling $514 billion, signaling strong future demand for AI infrastructure and enterprise solutions.youtubefinance.yahoo+1
Bulls vs. Bears on AI Spending
The negative free cash flow has intensified the debate between Alphabet bulls and bears.finance.yahoo
Bears argue that the massive depreciation charges on AI investments could further constrain finances, especially as the timeline for returns on AI remains uncertain. They worry that the company is spending heavily without a clear path to profitability on its AI compute investments.finance.yahoo+1
Bulls, on the other hand, believe the heavy spending is translating directly into growth. They highlight Google Cloud’s 82% revenue surge and expanding operating margins as proof that the investments are paying off. They also point to Alphabet’s strong balance sheet and $242.5 billion cash position as a buffer against short-term cash flow volatility.