Analysis
Google's $200 billion year, modelled
To earn 10% before tax, Google's 2026 spending needs about $44B a year of new cash profit. Its cloud unit added $24B of annual operating income in twelve months. The bull case clears the bar by 2028 only if cloud margins hold and Search keeps growing.
Alphabet expects to spend $195–205B on capital projects in 2026, up from $91.4B in 2025, and has said 2027 will be “significantly” higher. The same chip, three businesses argued that Google is the best-placed company to make such spending pay: it makes its own chips, fills its own machines and sells the answers. This piece puts numbers on that claim. It asks what the spending has to earn, what the latest quarter already shows, and what 2028 looks like if the bulls are right and if they are wrong.
The bar
Alphabet says about 60% of its spending goes on servers and network gear, written off over six years, and 40% on data centers. Take data centers at twenty years.
| One year of spending: $200B | |
|---|---|
| Depreciation it adds each year | $24B |
| Operating profit for a 10% pre-tax return | $20B |
| Cash profit needed each year | $44B |
| Years to pay back | 4.5 |
The spending compounds. If 2027 and 2028 run at $260B, Alphabet’s depreciation rises from $21B in 2025 to about $86B in 2028. To earn 10% before tax on the capital added since 2025, operating income in 2028 must be about $56B a year higher than it would otherwise be, after paying that depreciation.
What the latest quarter shows
The bull case rests on figures from April–June 2026, and they are strong.
- Cloud is earning, not just growing. Google Cloud revenue rose 82% to $24.8B. Its operating margin was 35.6%, up from 20.7% a year earlier and 11.3% two years earlier. Cloud operating income went from $2.8B to $8.8B a quarter, which is $24B a year added in twelve months. Cloud gets “just over half” of Google’s machine-learning compute. Its half of the 2026 bar is about $10B a year, so it is earning more than twice that already.
- The demand is signed. Cloud’s backlog was $514B at June 30, up from $108B a year earlier, though the definition widened in 2026. Just over half falls due within two years: about $128B a year, against a current revenue rate near $100B.
- Search grew faster with AI in it. Search revenue rose 17%, against 12% a year earlier. AI Overviews reach 2.5B people a month and AI Mode over 1B. The Gemini app has 950M monthly users, up from 450M.
- Google’s chips cost less to run. SemiAnalysis puts the full cost of Google’s latest TPU about 44% below Nvidia’s GB200 for Google’s own use. Google says the cost of serving Gemini fell 78% in 2025.
The model, 2028
| Operating income, $B | 12 months to June 2026 | Bull 2028 | Bear 2028 |
|---|---|---|---|
| Google Services | 157 | 213 | 173 |
| Google Cloud | 24 | 80 | 37 |
| Other Bets and Alphabet-level costs | −31 | −45 | −50 |
| Total | 151 | 248 | 160 |
| Gain over today | +97 | +9 | |
| Gain needed for 10% on new capital | +56 | +56 | |
| Free cash flow, at $260B of capex | 53 | about +34 | about −40 |
Bull: - Cloud converts its backlog and reaches $230B of revenue at a 35% margin. - AI keeps Search growing, and Services profit rises 13% a year. - Frontier-model costs rise to $45B.
Bear: - Cloud reaches $170B, but price cuts and rented capacity pull its margin to 22%. - Services profit grows 4% a year as depreciation lands on it.
The 2025–26 Services figure excludes the $3.5B EU fine.
In the bull case the new capital earns about 18% before tax, well above the bar. In the bear case it earns about 2%, well below the 9.6% of Bezos’s transportation machine, which he called fundamentally flawed. The bull’s “gain over today” also counts growth Google might have had without the spending, so it flatters the bulls. Even the bull case shows free cash flow in 2028 below today’s. The payoff comes only after spending stops rising.
How it is being paid for
Google no longer pays for this out of pocket. Operating cash of $186B over the twelve months to June will not cover $200B of capital spending in 2026 plus a $10B dividend. Since the end of 2025 Alphabet has:
- doubled its long-term debt, to $98B at June 30, then sold $25B more in August;
- raised $30.5B in common stock, including $10B from Berkshire Hathaway, and $19B in convertible preferred stock;
- set up a $40B program to sell shares on the market;
- bought back no stock in the first half.
Google’s share count is rising for the first time in years. A company with a 41% Services margin is issuing stock to build data centers. That is the clearest sign of how far ahead of its cash flow the build has run.
Two assets cushion it. The 2015 investment of $900M in SpaceX was worth $94B at June 30. A $40B commitment to a private company, reported to be Anthropic, carries a large gain too.
Where the bull case is weakest
- Google is renting capacity at the landlord’s price. In June SpaceX disclosed that Google will pay it $920M a month for access to Nvidia chips through mid-2029. That is $11B a year, close to half of Cloud’s operating income over the past twelve months. Google calls it a “bridging strategy” and warns of “modest margin pressure”. The lowest-cost producer is short of capacity and paying Nvidia’s margin and a landlord’s margin on top.
- Part of the backlog is money Google lent its own customer. Anthropic is among Google’s largest compute buyers: up to a million TPUs and about 3.5GW through Broadcom. Google has committed up to $40B to invest in it and put $3.2B into a New York data center that rents TPUs to it. Some of the Cloud backlog is Google’s own investment coming back as revenue. That is the CoreWeave–Nvidia pattern, one size up.
- Prices keep falling. In July Google priced Gemini 3.6 Flash below the 3.5 version. A 35% Cloud margin has to survive each new price cut.
What would settle it
- Cloud’s operating margin in Q3, the first quarter with the SpaceX rent in it. A hold near 35% supports the bull column; a drop toward the low 20s supports the bear.
- Search growth staying in the mid-teens as AI Mode gains ads.
- The 2027 capex figure, and whether operating cash covers it without more stock sales.
- Any disclosure of how much of Cloud’s backlog comes from Anthropic.