Google Cloud 390% Backlog Growth: Playing to Win Means Blazing New Trails

**Bob Evans** (0:00)
Hello, my friends, welcome back to Cloud Wars Minute. Last week, we talked about Google Cloud's extraordinary Q2 with revenue up 82% to almost $25 billion, backlog up almost 400% to $514 billion.
I want to talk today a little bit about a challenge that Google Cloud and the other hyperscalers are facing because this extraordinary growth requires very aggressive investments in CapEx to build out the data center capacity that these companies need to be able to meet the commitments they've made to these customers. Same challenges for Oracle, for Microsoft and for AWS, but the difference is this extraordinary growth rate for Google Cloud means they've got to plow even more in, get that set up. So I think we're getting down to one of these questions of, will these companies continue to have the courage to play to win as opposed to trying to appease investors who are rattled because of the spending levels that are going to chase these incredible opportunities are higher than some investors would like to think.
So if we just take a quick look at these numbers, I mentioned the big high growth rates. So even after something like this, you might think, wow, that's a hot company. Everybody's going to want a piece of that. Actually, right after Google Alphabet reported these numbers for Google Cloud, Google Alphabet also had to say that our CapEx budget for 2026 is going to go up slightly, and now it'll be about $200 billion, and they had negative cash flow for Q2 of 5.9 billion. So not a good thing, but it's not a long-term trend here.
The market reaction to this was, they hammered Alphabet stock, and their market cap went down $250 billion after Google Cloud reported this. And I laughed, thinking to myself, maybe they should have only grown 40 percent, and their backlog only 100 percent. Maybe they should have had a more mediocre or a less spectacular quarter, and then maybe they wouldn't grow so much, they wouldn't have to invest so much. Maybe investors like that. My point is, you got to keep a clear head in these crazy sorts of times, and I think Alphabet is doing exactly that. So Sundar Pichai, the CEO of Alphabet, cited immense opportunities during the Q2 earnings call. He talked about across the board, the AI stack, the complete AI stack, they have the power in the Cloud, the customers, the commitments, these huge businesses coming up. One of the things that they're going to do, instead of just saying, we'll keep plowing money into CapEx, they're going to do what they can there, but they believe these investments they're making now are going to pay off with significantly more data center capacity next year. So in the short term, though, they've got customers who are counting on them. So Google Cloud is going to tap into some third-party data center capacity, Pichai said, is one of the ways to take care of those customers, and it will be not a great deal financially for Google Cloud to do that, but they're willing to trade that very short-term pain for enormous contracts down the line and long-term, highly profitable things with customers. So again, we see here in the Cloud Wars, what got us here won't get us there, not only for Alphabet, but also Microsoft, Oracle, and AWS will get Microsoft's numbers later today, AWS and Amazon, I think, tomorrow. So we'll see how this same sort of dynamic plays out with them. The big thing here is, I think, customers have to be sure they're picking their AI and Cloud suppliers, companies that are committed to winning rather than playing not to lose because they're afraid of what investors might think in the short-term. It's a wild time here, but definitely, as I've said many times, the greatest growth market the world has ever known, and these big companies, the big hyperscaler companies are now faced with challenges that no company has ever had to face before. I applaud the alphabet leadership for playing to win rather than pulling their horns in and saying, well, let's do what we can not to lose. That's just not going to cut it in the Cloud Wars and certainly not with the hyperscalers. Got a detailed article with a lot more on this, some insightful commentary from CEO Pichai and also CFO Anat Ashkenazi of Alphabet. Thanks for being with us here at Cloud Wars Minute. I hope you have a fantastic day.