Alphabet and Microsoft Q3 2026: Capex Doubled, and Alphabet's Free Cash Flow Went Negative Again

Alphabet spent $51.4 billion on property and equipment in the third quarter, up from $24.0 billion a year earlier, and its free cash flow was negative $9.1 billion, per its earnings release. It was the second negative quarter in a row, after minus $5.9 billion in the second. Microsoft, reporting the same evening, spent $39.4 billion in cash on property and equipment, double the $19.4 billion a year earlier, and its free cash flow fell 27% to $18.6 billion, per its release.

Alphabet's revenue grew 25% to $127.6 billion, so the top line was not the problem. Google Cloud more than doubled, up 103% to $30.7 billion, with operating income of $11.1 billion against $3.6 billion a year earlier. Chief executive Sundar Pichai said Alphabet is now on "a half-trillion dollar revenue run rate." Microsoft's revenue rose 19% to $92.3 billion, Azure grew 48%, and its commercial backlog of signed contracts rose 73% to $677 billion.

The two companies split on cash from operations. Microsoft's rose 29%, so its free cash flow fell only because spending rose faster. Alphabet's fell 13% even as its operating income rose 30%, and the release does not explain the gap. Over the last twelve months Alphabet has spent $159.8 billion on property and equipment and kept $19.7 billion of free cash flow.

Alphabet's net income also fell, to $26.2 billion from $35.0 billion, as other income swung to a $8.2 billion loss from a $12.8 billion gain. The Motley Fool attributed most of that to an $8.7 billion loss on equity securities. Shares fell about 10% after hours, per Investing.com.

Neither company is slowing down. Alphabet kept its 2026 capital spending guidance of $195 billion to $205 billion and said 2027 spending will "increase significantly," per The Motley Fool. It has spent $132.0 billion in the first nine months, so the guidance implies $63 billion to $73 billion in the fourth quarter alone, well above the third quarter's record. Headcount grew more slowly, to 204,757 from 190,167 a year earlier.

Microsoft's spending including finance leases was $45.2 billion, about $5 billion under what analysts expected, and finance chief Amy Hood said some third-party capacity deliveries planned for the quarter slipped, CNBC reported. Microsoft's shares rose about 4% after hours. Its GAAP net income rose 32% to $36.6 billion. Stripping out the effect of its OpenAI investments, as Microsoft does in its own adjusted figures, net income rose 18%.

Microsoft's signed backlog is growing faster than its revenue. Commercial remaining performance obligations, the contracted revenue it has not yet recognized, rose 73% while revenue rose 19%. That gap is the case for building ahead of demand.

Who is filling those data centers? Part of the answer is in Anthropic's S-1. It commits Anthropic to at least $114.5 billion of Google spending through July 2033, plus an estimated $125 billion to $150 billion of further TPU capacity, and at least $44.9 billion with Microsoft starting next month, as we laid out on October 26. Alphabet said TPU system sales were "a meaningful contributor" to Cloud's growth.

The spending is outrunning the cash at one of the two. Alphabet is now paying for data centers with more than its business brings in each quarter. The lenders and builders downstream of these companies are already paying double-digit rates to keep up, which we priced on October 19.