Alphabet's Four-Month Slide Ends with a Warning: Free Cash Flow Under Pressure

Alphabet, the parent company of Google, has been on a four-month slide, with each month closing lower than the previous one. This unusual streak hasn't happened since 2015. The stock is currently trading at around $337 and has fallen about 18% from its 52-week high of $408.61 in mid-May.

Despite this decline, Alphabet's business isn't struggling. In fact, its second-quarter report showed revenue growth accelerating to 24% year-over-year, with profits growing even faster at 30%. The company's operating margin also widened from 32% a year earlier to 34%.

The growth was broad-based across all segments, including Google Search & other revenue, YouTube ads revenue, and Google Cloud revenue. However, the issue lies in what it costs to serve this demand. Alphabet's capital expenditures doubled to $44.9 billion in the second quarter, putting pressure on free cash flow, which turned negative at $5.9 billion.

Management has raised its full-year guidance for capital expenditures to a range of $195 billion to $205 billion and expects higher depreciation expense from new infrastructure to keep pressuring profits. However, Google Cloud's improving profitability suggests that the heavy AI spending is already earning a return.