Alphabet (GOOGL) shares climbed nearly 3% at Monday's open, recovering some ground after last week's post-earnings selloff, as Wall Street analysts broadly reaffirmed their bullish outlook on the company's artificial intelligence strategy even while trimming price targets.
The bounce came amid a broader market recovery, with the S&P 500 and Nasdaq 100 both up 0.7% as geopolitical tensions eased. Still, the stock remains roughly 6.6% lower over the past five sessions after investors reacted negatively to sharply higher capital expenditure guidance and Alphabet's first-ever quarter of negative free cash flow since listing in 2004.
Analysts cut targets but keep positive ratings
A clear pattern has emerged across the Street: several brokerages lowered their price targets for Alphabet while maintaining buy-equivalent ratings, signaling that analysts still see long-term upside despite near-term valuation caution.
Phillip Securities upgraded Alphabet to Buy from Accumulate, though it reduced its target to $425 from $450. Even after the cut, the revised target implies roughly 33% upside from Friday's close. Analyst Serena Lim Yi Qi noted that Alphabet delivered "robust revenue growth across core business segments," supported by resilient advertising performance following Gemini integration. However, she acknowledged that record AI spending caused free cash flow to turn negative for the first time. "We believe temporary FCF pressure should support stronger long-term AI growth and revenue visibility," Qi wrote, adding that Alphabet's vertically integrated AI ecosystem and Gemini models should continue driving growth across advertising and cloud.
DA Davidson reduced its target to $350 from $375 while keeping a Neutral rating. Cantor Fitzgerald lowered its target to $420 from $435 but maintained Overweight, citing stronger-than-expected Google Cloud performance alongside rising AI infrastructure costs. Raymond James cut its target to $400 from $425 but reiterated a Strong Buy rating, describing results as broadly in line with expectations and highlighting stronger performances from YouTube and Google Cloud despite relatively softer Search growth.
AI spending overshadows blockbuster cloud growth
Alphabet's second-quarter earnings highlighted both the opportunities and costs of the AI race. Google Cloud revenue surged 82% year over year to $24.8 billion, far exceeding analysts' forecasts for roughly 64% growth, according to LSEG data.
Yet that positive surprise was overshadowed by management's announcement that capital expenditure in 2026 is now expected to reach between $195 billion and $205 billion, up from earlier guidance of $180 billion to $190 billion and above analyst estimates of approximately $188 billion. The company also reported negative free cash flow of $5.9 billion, reversing nearly $25 billion in positive free cash flow generated in the same quarter last year.
CFO Anat Ashkenazi said the higher spending primarily reflects efforts to expand computing capacity fast enough to meet surging AI demand, and cautioned that free cash flow would remain under pressure as Alphabet continues building technical infrastructure.
Investors worry about mounting capital costs
The market reaction reflects growing concern that even the world's largest technology companies are now spending faster than they generate cash. Thomas Monteiro, senior analyst at Investing.com, questioned whether investors would remain patient if capital spending continued climbing. "After a negative cash flow quarter, the new raise in capex does not sit well for Alphabet," he said. "The market's most reliable cash generators are now spending more than they bring in. As long as revenue keeps accelerating, investors will tolerate it. But capital has a real cost again, and the room for error is shrinking every quarter."
This dynamic is part of a broader trend reshaping Big Tech finances. As the AI boom reshapes Wall Street's valuation playbook, infrastructure spending has taken center stage, forcing companies that once relied on asset-light software models into far more capital-intensive businesses. Credit ratings agency Moody's warned this week that the transition from asset-light to asset-heavy models requires unprecedented levels of investment and capital raising. Moody's estimates that annual capital expenditure across Alphabet, Microsoft, Amazon, Meta, Oracle and CoreWeave will reach approximately $785 billion in 2026 before approaching $1 trillion the following year.
For now, Wall Street appears willing to give Alphabet the benefit of the doubt, betting that its AI investments will eventually pay off. But with cash flow under pressure and capex still climbing, the margin for error is narrowing.
This article is for informational purposes only and does not constitute financial advice.
