「Microessay」 Sparks Panic Again: AI Bubble Bursts, Google May Become First Mega Corporation to Cut AI Spending

Original Article Title: AI Bubble Burst: Alphabet Could Be The First To Cut AI Capex
Original Article Author: Damir Tokic, Seeking Alpha
Original Article Translator: Sulig

Editor's Note: Damir Tokic, a columnist for the U.S. investment platform Seeking Alpha and a finance professor/Certified Technical Analyst (CTA), published a forward-looking analysis of Alphabet's earnings report this Monday, sparking widespread discussions in the American stock investment community. In the article, it was suggested that Google's parent company, Alphabet, could become the first large tech company to reduce AI capital expenditure. It is worth noting that Alphabet will hold its Q2 2026 earnings conference call at 4:30 AM on July 23, Beijing time.

Driven by this viewpoint and market sentiment, discussions on AI capital expenditure and the "AI bubble" have once again heated up, causing stocks of AI semiconductor companies such as Micron to switch from gains to losses intraday. The following is the original content:

Alphabet to Report Earnings First

Alphabet (GOOG) (GOOGL) will be the first to report earnings, with the market focusing on AI capital expenditure guidance. In April of this year, Alphabet raised its 2026 AI guidance and signaled a significant increase in AI capital expenditure for 2027.

However, the market is increasingly concerned about the sustainability of AI capital expenditure on multiple fronts, and hyperscalers may have to slow down or even cut AI capital expenditure in the remaining months of 2026 and in 2027. Given that Alphabet will be the first to report Q2 earnings, it may become the first hyperscaler to lower its AI capital expenditure expectations, with other companies—Meta (META), Microsoft (MSFT), Amazon (AMZN), and Oracle (ORCL)—likely to follow suit.

In fact, the recent underperformance of AI capital expenditure beneficiary stocks, such as in the semiconductor sector (SMH), reflects the market's anxious sentiment towards AI capital expenditure.

As described later in this article, Alphabet's precarious situation is exacerbated by its adjusted free cash flow issues and the need to incur debt and issue new shares for AI capital expenditure.

Even just hinting at a slowdown in AI capital expenditures, Alphabet could accelerate the bursting of the AI bubble—making it a macro signal.

Macro Perspective

First, let's look at the big picture. The U.S. economy, especially the stock market, is currently heavily reliant on AI capital spending. It is estimated that by 2026, AI capital spending will be around $700 billion to $800 billion, surpassing $1 trillion in 2027, mainly focused on data center infrastructure construction.

However, due to various constraining factors, this projected AI capital spending is challenging to materialize.

· Tokenomics and Return on Investment (ROI): The most significant constraint is that the ROI of AI capital spending is uncertain and likely much lower than the cost of capital—meaning AI capital spending could be a wasteful investment. Specifically, U.S. data centers are designed for expensive cutting-edge models, while AI-adopting enterprises require cheap open-source models. Thus, there is a mismatch. With the model substitution effect (from expensive to cheap) causing token prices to continuously decline, this will squeeze the profit margins per token for hyperscale enterprises, rendering the entire project financially unsustainable. China's new open-source model Kimi K3 demonstrates that powerful large language models can be built at an extremely low cost—rendering all this AI capital spending unnecessary.

· Energy and Water Resource Constraints: Data centers require a significant amount of energy for power and water for cooling, which are tangible physical constraints limiting further expansion of data center infrastructure.

· Regulatory and Resistance Sentiment: New York State was the first to issue a one-year ban on data center construction, and several other states are considering similar measures. In the U.S., "Red states" like Texas seem to allow data center construction, while "Blue states" like New York hold opposing views. Therefore, the issue of AI infrastructure construction has taken on a political trend. Even in Texas, consumer resistance to data centers is growing, which could pose a challenge for the Republican Party in the upcoming elections.

Thus, AI infrastructure construction faces real financial, physical, and political constraints, making it difficult to see how the current AI capital spending guidance can be sustained.

As mentioned earlier, even a hint of a slowdown in AI capital expenditures could accelerate the bursting of the AI bubble.

Alphabet's Dilemma

The market narrative around Alphabet has always been:

· "The risk of underinvestment is greater than the risk of overinvestment" — implying that Alphabet is aware of the potential for overinvestment but is still willing to continue AI capital spending due to competitive and strategic needs;

· "Demand for computing power outstrips supply" — implying that Alphabet has not seen oversupply and has clearly stated that if more capacity were built, revenue would be higher.

Therefore, there is no indication that Alphabet will slow down or reduce its AI capital spending guidance.

However, issues are arising on the financing side of AI capital spending — these are real financing constraints.

Specifically, Alphabet seems to have a significant issue with free cash flow; hence, it is forced to maintain AI capital spending through debt (issued over $300 billion in bonds in the first quarter) and equity financing (announced over $800 billion in new share issuance) — even terminating stock buybacks in the first quarter.

In fact, Alphabet's free cash flow issue may be more severe than reported. The Wall Street Journal, in the article "How Big Tech's Financial Data Masks the True Cost of AI Buildout," quotes insights from "Heard on the Street" columnist Jonathan and Purdue University Professor Kevin Koharki, pointing out that adjusting for economic costs such as equity incentives, Alphabet's free cash flow for 2025 could be understated by 67%, and for the first quarter of 2026 by 62%. This means the reported $730 billion free cash flow in 2025 could drop to $240 billion, and the $100 billion free cash flow reported for the first quarter of 2026 could drop to around $40 billion.

The key implication is that Alphabet cannot sustain AI capital spending without borrowing and issuing new shares — increasing debt would raise credit concerns (especially in low ROI scenarios), while share dilution would erode existing shareholder equity.

As we approach the second-quarter earnings report, Alphabet must update its AI capital spending guidance — presenting a challenging situation for investors.

· If Alphabet raises its AI capital spending guidance while facing financial constraints (tokenomics, ROI), physical constraints (energy, water, resistance sentiments), and financing constraints (free cash flow, debt, equity), investors will question management's motives and prudence — likely causing a stock price decline.

· If Alphabet cuts AI capital spending guidance, it will be interpreted as a macro signal, likely accelerating the burst of the AI bubble, especially severely impacting AI capital spending beneficiaries such as SMH.

· Even if Alphabet only reaffirms its 2026 guidance and cautiously releases a mildly strong signal for AI capital spending in 2027, it could be interpreted as a slowdown in AI capital spending, thus generating the same macro effect as reducing capital expenditures.

Therefore, this is indeed a dilemma for Alphabet and the broader market. Investors are unlikely to reward an increase in capital spending, while a cut in capital spending is likely to penalize the AI capital spending-beneficiary sectors.

Looking at the recent performance of the semiconductor sector, investors seem to be preparing for a slowdown or reduction in AI capital spending.

Alphabet Financial Position

Approximately 80% of Alphabet's revenue comes from its service business (ad-driven), primarily from Google Search, and about 20% comes from Google Cloud.

Alphabet First Quarter Earnings

Alphabet CEO Sundar Pichai stated after the first-quarter earnings release:

The start of 2026 has been strong. Our AI investments and full-stack strategy are activating all aspects of the business. The search business performed well this quarter, with AI experiences driving usage growth, queries reaching new highs, and revenue increasing by 19%. Google Cloud revenue grew by 63%, backlogged orders almost doubled sequentially, exceeding $460 billion. Fueled by the Gemini app, this was the strongest quarter ever for our consumer AI business. Overall paid subscription users have reached 350 million, with YouTube and Google One being key drivers. Gemini Enterprise edition is gaining momentum, with a 40% increase in paid monthly active users sequentially. Finally, I am pleased to see Waymo's fully autonomous ride counts exceeding 500,000 per week. These outstanding achievements are built on our differentiated full-stack strategy. Our in-house models, like Gemini, currently process over 16 billion tokens per minute through direct customer API calls, a 60% increase sequentially. Seeing our AI investments create value for users, customers, and businesses is very exciting.

Therefore, Google Search saw a growth of approximately 19%, with the overall profit margin increasing from 34% to 36%, and AI Overviews have not yet eroded ad revenue.

Google Cloud saw a 63% growth, with strong demand for computing power—this being Alphabet's primary growth driver. Additionally, Gemini's API usage increased, token usage grew by 60%, indicating that the model substitution effect has not yet materialized.

All these are positive signals, with no factors in the financial data pointing towards a downgrade—in fact, Alphabet is seen as an AI winner, with even Berkshire Hathaway investing in Alphabet.

However, issues have gradually emerged in the cash flow statement, even without adjusting for free cash flow. With a decline in free cash flow, Alphabet will not be able to achieve the targeted AI capital expenditure without taking on significant credit risk or diluting existing shareholder equity.

Alphabet First Quarter Earnings Report

Impact and Insights

Alphabet reported strong first-quarter financial data, with the only danger signal being the decline in free cash flow—especially the adjusted decline—which could be a significant warning to downgrade GOOG to a "sell" rating.

Without additional debt and equity issuance, Alphabet cannot meet the AI capital expenditure guidance, increasing both credit risk and dilution of shareholder equity while reducing buybacks. In the context of the larger picture, this is negative news.

If Alphabet were to cut back or slow down the AI capital expenditure guidance, investors would have to revise growth expectations downward, leading to a contraction in valuation multiples—again, negative news. It's important to note that GOOG's GAAP P/E ratio is 26 times, not particularly expensive. However, given concerns about overall profit overinflation, the actual P/E ratio could be much higher.

Please note, this is also a macro view—as the AI bubble bursts accelerate, the S&P 500 (SPY) and Nasdaq 100 (QQQ) may face a significant pullback, with Alphabet potentially becoming the first mega-cap to cut AI capital expenditure guidance.

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