Google Edges Amazon on NVIDIA Tax Due to Custom Silicon

Alphabet's Google Cloud business grew by 82% year-over-year in Q2 FY2026, outpacing Amazon Web Services (AWS) at 37%, despite both companies burning through free cash. However, while AWS earned a higher operating margin of 39.4%, Alphabet's cloud operating margin was still respectable at 35.6%. The key difference lies in their respective approaches to capital expenditures.

Alphabet spent $44.92 billion on capex last quarter and invested heavily in custom silicon, including TPUs (Tensor Processing Units) that power its Gemini AI model. This allows Google Cloud to scale faster off a smaller base while running Gemini on in-house hardware. In contrast, Amazon spent more, $54.21 billion, but still relies on NVIDIA GPUs for some of its AI workloads.

Sundar Pichai emphasized Alphabet's focus on making sure it has the necessary resources to compete at the forefront of AI innovation, rather than simply renting external hardware from suppliers like NVIDIA. Meanwhile, Andy Jassy highlighted Amazon's own efforts in AI and chips, including Project Rainier, which is leveraging Trainium2 chips for Anthropic workloads.

The financial implications are stark: Alphabet raised full-year 2026 capex guidance to $195 billion to $205 billion, while its free cash flow fell to negative $5.86 billion. Amazon guided higher at roughly $200 billion and saw its TTM (trailing twelve months) free cash flow turn negative at -$7.6 billion.