{"id":15,"title":"Google's Cloud Doubled. And That's the Problem.","slug":"google-cloud-doubled-problem","type":"post","shortSummary":"Cloud grew 103% and the stock had its worst post-earnings day on record. Cloud eats cash, search makes it, and search is slowing, so Google now sells stock and borrows.","body":"Google's cloud business doubled in a year.\n\nThe next day, the stock had its worst earnings day ever.\n\nGoogle's post-earnings moves since 2023, with October 2026 as the worst\n\nCloud burns cash on chips and data centers. Search is what pays for it.\n\nAnd search is slowing, partly because AI Mode earns less per search.\n\nThis year, Google's own cash stopped covering the bill. It sold stock and borrowed the rest.\n\nHere's what I found.\n\nSame night, different verdict\n\nAlphabet reported on October 28. Revenue was $127.6B, up 25%. Cloud, the part of Google that sells AI, was $30.7B.\n\nThe next day the stock closed at $283.82, down 12.6% from $324.89. CNBC counts it as Google's worst post-earnings day since it went public. In the twelve reports since October 2023, the worst before this was −9.5%.\n\nMicrosoft reported the same evening. Its stock barely moved: −0.2%.\n\nSame night. Same AI story. Very different reaction.\n\nThe market was picking winners among the AI spenders.\n\nMore searches, slower money\n\nSearch is still Google's engine. $63.4B this quarter, half of all revenue.\n\nOn the call, Sundar Pichai said Search queries grew at their fastest rate in five years.\n\nRevenue didn't follow. Search revenue growth went from 19% to 17% to 12% in two quarters. Against the quarter before, it grew by just $79M.\n\nSearch revenue growth falling from 19% to 12% after AI Mode launched\n\nMore searching, slower money. How?\n\nAn analyst asked exactly that. Philipp Schindler, Google's chief business officer, named currency as the biggest factor. Then he pointed to \"lower monetization\" in AI Mode, the chat-style search Google launched in May 2025.\n\nThat's Google saying it out loud: the AI version of search earns less than the old one.\n\nMore clicks, smaller price rises\n\nThe 10-Qs show the mechanism.\n\nBefore AI Mode, Google grew mostly by charging more per click. Paid clicks grew 2–6% a year. Cost per click grew 7–8%.\n\nAfter AI Mode, it flipped. This year paid clicks grew 13%, 13% and 8%. Cost per click growth fell to 5%, 3% and 4%.\n\nSince AI Mode, Google grows search by selling more clicks, not by raising prices\n\nGoogle now grows search by selling more clicks, not by raising prices. Prices still rise, just slower. And in Q3 the click boom cooled: 8%, down from 13%.\n\nThe cash miss wasn't capex\n\nMost headlines say the same thing: Google's AI spending binge burned its cash.\n\nThat's only half right.\n\nCapex was $51.4B this quarter. Analysts expected about $55.1B. Google spent less than expected.\n\nThe surprise was on the other side. Operating cash flow fell 13% from a year ago, to $42.3B. That includes a $5.2B payment for an old EU fine and a build-up of TPU chips in inventory.\n\nQuarterly capex more than doubling while free cash flow turns negative\n\nPut together, free cash flow was −$9.1B. A year ago it was +$24.5B.\n\nIt's the second negative quarter in a row.\n\nA plan that only goes up\n\nThe spending plan has one direction.\n\nIn February 2025, Google planned about $75B of capex for the year. It raised that to about $92B.\n\nFor 2026, it started at $175–185B. It's now at $195–205B.\n\nFor 2027, analysts now expect about $312B. Management only said capex will \"increase significantly\".\n\nGoogle's capex guidance updates since February 2025, and the 2027 consensus\n\nTo hit this year's range, Google has to spend $63–73B in the fourth quarter alone. More than any quarter so far.\n\nWho pays for the data centers\n\nThis is the chart I'd show anyone asking who pays for AI.\n\nOver the last twelve months, Google made $179.6B of operating cash. Capex ate $159.8B of it. That's 89%.\n\nSo where did the rest come from?\n\nTwelve-month cash bridge: capex eats operating cash, investors fill the gap\n\nFrom investors. New shares brought in $61.9B. Net new debt brought in $96.6B. Together, $158.5B.\n\nAlmost exactly what Google spent on capex.\n\nI'm not saying the bond money went straight into servers. Cash is cash. But the picture is clear: a year ago, Google paid for its build-out from its own pocket. Now outside money covers the same amount.\n\nThe buyback machine reversed\n\nGoogle used to be one of the biggest buyers of its own stock. $11.5B in Q3 2025 alone.\n\nIn 2026, it bought back zero.\n\nIt sold stock instead. $30.5B of common shares and $19.1B of preferred shares in Q2. Another $12.4B through an at-the-market program in Q3, about 36 million shares sold straight into the market.\n\nBuybacks stop in 2026 while share and debt issuance take over\n\nAbout $27.6B of that program is still left.\n\nFor shareholders, that's the real change. Google used to buy back its stock by the tens of billions. Now it sells it.\n\nGoogle is turning into a cloud company\n\nWhy would Google do this? Because the part of the business that's growing needs the money.\n\nAt the end of 2024, Cloud was 12% of Google's revenue. Now it's 24%. It brings 27% of operating income, with a 36% margin.\n\nCloud's share of Alphabet revenue doubling from 12% to 24% in seven quarters\n\nCloud is the business AI labs rent their compute from. Including Anthropic, which rents compute from Google while Google builds Gemini against it.\n\nThat's the swap. Search is a business that throws off cash. Cloud is a business that eats it before it pays back: chips, data centers, power.\n\nGoogle is moving from the first kind to the second, and it's paying for the move with investors' money.\n\nNot just Google\n\nGoogle isn't the first to be punished for this.\n\nMeta fell about 7% after its earnings a week ago, on the same worry: a steep bill for the AI build-out. Oracle slipped after its last quarter too.\n\nSo I put five of the biggest AI spenders side by side. One number: how much of their operating cash goes into capex.\n\nCapex as a share of operating cash flow for Amazon, Oracle, Alphabet, Meta and Microsoft\n\nFour of the five spend more on capex than their business brings in. Amazon 179%, in a quarter it reported the same day Google's stock fell. Oracle 123%. Alphabet 121%. Meta 104%.\n\nOnly Microsoft is under 100%, at 68%. And Microsoft was the one the market left alone.\n\nAI demand looks fine. Cloud doubled, and Google says it can't build capacity fast enough.\n\nWhat worries investors is who pays for the build-out. Microsoft pays from its own cash. Meta, Oracle and now Google lean on outside money, and the market treated them the same way.\n\nGoogle still prints money from search. The question is how long search can pay for the thing that's replacing it.","author":{"id":null,"name":"Viet Phan","displayName":"Viet Phan","slug":null,"shortBio":"An independent researcher with interests in finance, technology, AI and emerging business models. 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And That's the Problem.. by Viet Phan. published 2026-10-29T21:17:22.748Z. https://vietphanx.com/archive/google-cloud-doubled-problem. License: All Rights Reserved","citation":{"title":"Google's Cloud Doubled. 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