Key Points
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Management raised its 2026 capital expenditures outlook from a midpoint of $185 billion to a midpoint of $200 billion, and it said that number would be higher next year.
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Google Cloud revenue is growing faster than its top competitors, Amazon and Microsoft.
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Buffett is betting on Alphabet, and he usually likes companies that don't have to spend a lot of money to make a lot of money.
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The market has soured on Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock since the company said it planned to raise capital expenditures (capex) to up to $205 billion this year, a significant increase from its original outlook of $180 billion to $190 billion.
This announcement completely overshadowed the company's excellent second-quarter performance, and the question investors are grappling with is whether the outlay is justified. Clearly, if the market believed there would be substantial positive results, it wouldn't react negatively.
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However, the market isn't always right, and sometimes, that's where investors can pick up the best opportunities. Here's why Google Cloud's growth justifies the capex spend, and at the current price, Google is priced to buy.
All the elements of a high-growth success
Alphabet is best known for its Google division, which controls 90% of the internet search market, but it also owns several dominant companies, including YouTube and Android.
Today, its major opportunities are in artificial intelligence (AI); like the other hyperscalers, it's building out to capture market share. Although it has strong competition in cloud services from Amazon, whose Amazon Web Services (AWS) division has 28% ofglobal marketshare, and Microsoft, which has 21%, Google, which was 14%, is growing faster than both.
In the 2026 second quarter, Google Cloud revenue increased 82% year over year. Accelerating sales as the foundation grows is an impressive feat and implies a significant opportunity. If it doesn't invest to meet the staggering demand, it will lose the chance to capture market share and reward investors through higher growth.
CEO Sundar Pichai said that management believes its spending delivers an attractive return on investment (ROI) and would not be spending this way otherwise. However, it will take time for the spend to begin producing results. In fact, even as Alphabet reported negative free cash flow for the first time since it became a public company, it has already warned investors that the capex spend is likely to increase again next year.
Risky business?
That's when it starts looking riskier to investors. Alphabet is raising money through both debt and equity to finance capex, thereby raising its risk profile.
Interestingly, Warren Buffett has become a huge Alphabet fan, and it's now Berkshire Hathaway's third-largest position, tied with Coca-Cola. Buffett has often said that great businesses don't need a lot of money to make a lot of money and that the asset-light model is what he likes about tech companies like Apple. "It's always better to make a lot of money without putting up anything than it is to make a lot of money by putting up a lot of money," he said at the 2025 annual meeting.
Berkshire CEO Greg Abel and Buffett clearly think the returns justify the spend. Pichai explained that the AI business "looks like extraordinary opportunities with extraordinary returns for executing well on those opportunities."
Alphabet has proven itself multiple times by harnessing opportunities, leveraging its platform for greater growth, and delivering healthy profitability. It's likely to come through again with AI, and smart investors will recognize that this is a chance to buy on the dip.
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Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, and Microsoft. The Motley Fool has a disclosure policy.