We heard from Google today on Q2. The capex boom continues, and the AI boom continues.
Google spent $44.9 billion on data centers and chips in ninety days. That's double a year ago. Full-year guidance was raised from $180-$190 billion to $195-$205 billion.
But the loads of quarterly free cash flow that Google has been funding its infrastructure investments with for the past three years, has gone negative.
Free cash flow is what's left after a company pays its bills and builds its infrastructure. And Google has been one of the greatest free cash flow machine in the history of capitalism.
Over the past five years, Google has generated about $17 billion in FCF (on average) every quarter — until now.
This quarter it burned $5.9 billion more than its operating cash flow.
And not only are they drawing down in excess of that monster, record $39.1 billion operating cash flow, they are borrowing money to fund the infrastructure spending — more than $50 billion in new debt since the beginning of the year.
Why do it?
Because the demand side is extraordinarily strong.
Cloud revenue grew 82%, to $24.8 billion, against Wall Street expectations of 64% growth. The backlog of signed, contracted future cloud business now stands at $514 billion. Those are contracts, not projections. Google's models are processing 22 billion tokens a minute, up from 16 billion just one quarter ago.
With that demand, and that backlog, the faster they build, the more they monetize.
Over the past year, Google Cloud produced 54 cents of additional operating profit for every additional dollar of revenue. So, they borrow money at mid-single-digit rates, and turn that into datacenter revenue that generates better than 50% incremental operating margins.
Those are the economics behind the cash flow drawdown, and the borrowing.
Remember, as we discussed last week, the AI inputs are scarce (advanced chips, memory, power, compute), margins are historic. Where AI output is abundant, competition hands the gains straight to the customer.
Google sits on both sides.
It ships ever-cheaper models on one side driving the abundance — and on the other side it's now borrowing money to buy more of the scarce, high growth/high margin stuff.
The world's biggest customer of the chokepoints (the compute) just told us the chokepoints are worth levering the balance sheet for.