In early 2026, Sundar Pichai, in a rare admission during a BBC interview, stated that there were 'some irrational elements' in the current AI market. This comment was forwarded to social media by CNBC host Jim Cramer, along with a more blunt suggestion: 'Stop irrational spending.'

This virtual debate didn't produce a clear winner but brought a critical question to the forefront: If even Google's CEO believes there is a bubble in this Track (referring to the AI sector), are the billions being poured into data centers a calculated move or an arms race that no one can afford to stop?

Around the same time, Warren Buffett offered his answer. Berkshire Hathaway's stake in Google rose from $4.3 billion when first disclosed in the third quarter of 2025 to approximately $31 billion by the end of the second quarter of 2026, making it Berkshire's third-largest holding after Apple and American Express. During a CNBC interview in mid-July, Buffett personally confirmed that he led this investment and admitted, 'Not buying earlier was a mistake.' For an investor who has avoided tech stocks for decades, this was a rare admission.

A week later, Google released its second-quarter earnings. Revenue reached $119.8 billion, up 24% year-over-year, marking the best quarter in the past five years. Google Cloud's revenue hit $24.8 billion, a staggering 82% increase year-over-year, with an operating margin of 35.6%. Net profit soared to $112.1 billion, a 298% year-over-year surge.

Image produced by Caibao Ji 

While the earnings figures were explosive, the stock price plummeted more than 7% in subsequent trading sessions, erasing tens of billions in market value overnight. The reason? Google revised its full-year 2026 capital expenditure guidance upward from $180-$190 billion to $195-$205 billion, with management also hinting at a significant increase in 2027.

Pichai mentions a bubble, Buffett says he bought too late, and the market says they're burning too much cash. Who's wrong?

01

Google Cloud: Fastest Growth, but Starting from Too Far Behind

For a long time, Google Cloud was the awkward presence in Alphabet's earnings reports—impressive growth but consistent losses, with an operating margin as low as -62% in 2020.

This narrative was completely rewritten over the past two years.

In the third quarter of 2023, Google Cloud achieved its first full-year profit, with margins climbing steadily to 35.6% by the second quarter of 2026. The growth curve was even steeper: from 28% in the first quarter of 2025 to 32% in the second quarter, then to 63% in the first quarter of 2026, and finally surging to 82% in the second quarter—the fastest acceleration in five years.

But beneath the glittering surface lies a mismatch between production and sales.

Management revealed during the earnings call that Google Cloud's contract backlog has surpassed $500 billion, with more than half expected to convert into actual revenue within the next 24 months.

Google Cloud CEO Thomas Kurian admitted after the earnings release that actual client spending exceeded committed amounts by about 50%, forcing the company to rent additional capacity from third-party AI cloud providers. In an extreme case, Meta was denied some capacity requests due to Google's insufficient computing power and was even forced to limit internal engineers' use of AI tokens.

Capacity bottlenecks are also reflected in market share.

According to Synergy Research, in the global cloud infrastructure market in the first quarter of 2026, AWS held 30%, Azure 25%, and Google Cloud just 13%. While Google Cloud's 82% growth rate was the fastest among the three, its 13% market share base means its absolute capacity to handle external orders remains limited—in other words, it's running the fastest but still starting too far behind to claim leadership; it's merely catching up.

02

Search: Cyclical Tailwinds Outweigh AI Contributions

In the second quarter, Google's search and other businesses generated $63.3 billion in revenue, up about 17% year-over-year—one of the best growth rates in the past ten quarters. YouTube advertising revenue reached $11 billion, up about 13% year-over-year. Combined, the advertising business grew more than 14% year-over-year.

Management's explanation was straightforward: AI Overviews and AI-driven features haven't replaced search; instead, they're driving growth in search query volume. Users are asking more detailed and frequent questions, creating more opportunities for ad placements.

Of course, we maintain our previous view: In these results, the benefits of the U.S. economic cycle outweigh AI's contributions.

First, the U.S. digital advertising market is in a period of overall prosperity.

According to the IAB (Interactive Advertising Bureau), U.S. digital ad spending is expected to grow by 9.5% to 11% in 2026, with digital video ad spending up 11%—nearly double the overall ad market growth rate. The total U.S. digital ad market is projected to reach $413.24 billion in 2026. As the largest player in the industry, Google is simply riding the rising tide.

Winterberry Group forecasts that U.S. advertising, marketing, and data spending will reach $664.2 billion in 2026, up 9.4% year-over-year, driven by catalysts such as the World Cup, Winter Olympics, and U.S. midterm elections.

Second, during the 2026 World Cup, YouTube's related content attracted 1.7 billion unique viewers.

The most telling evidence is regional performance: In the second quarter, revenue growth in the U.S. market surged to 32.1% year-over-year, significantly outpacing EMEA's 15.0%, Asia-Pacific's 17.2%, and the rest of the Americas' 22.5%. This marked the fastest single-quarter acceleration in the U.S. market in the past fourteen quarters.

Thus, attributing the second quarter's better-than-expected performance solely to AI may overestimate the technology's short-term impact while underestimating the weight of macroeconomic cycles and event-driven catalysts.

Google's advertising business is standing on the shoulders of the broader digital ad market's prosperity, with the World Cup providing an extra boost. AI is a bonus but not the complete answer.

03

Accelerated Capital Spending: Catching Up on Lost Ground

Returning to the core issue: Annual capital expenditures of $195-$205 billion approach the company's total revenue for all of 2016. From $6.289 billion in the first quarter of 2023 to $44.924 billion in the second quarter of 2026, capital spending has grown more than sixfold in 14 quarters—about 7.1 times the original level.

Data source: Alphabet's historical earnings reports, Q1 2020—Q2 2026

Currently, three reasons support the judgment that 'there's no need to worry too much.'

The first layer is capacity certainty.

Management admitted during the earnings call that demand for AI infrastructure remains strong, but supply bottlenecks continue to limit delivery speeds. Orders are backlogged, and no amount of construction seems sufficient. During this period of supply-demand imbalance, whoever builds capacity first locks in clients and revenue within their ecosystem. Being late means watching enterprise clients sign with Microsoft or Amazon.

Nearly all this money is flowing into servers and data centers, suggesting a pure capacity grab that can easily create a virtuous business cycle.

The second layer is cost curve certainty.

Developing in-house TPUs and building proprietary data center networks essentially involves using fixed asset investments to reduce future marginal costs. Once scale effects take hold, Google Cloud's unit computing costs will be lower than competitors relying on external GPU purchases.

Notably, the company's overall R&D, sales & marketing, and general & administrative expense ratios combined not only failed to balloon alongside capital spending but actually declined from 31.2% in the first quarter of 2023 to 27.6% in the second quarter of 2026.

The third layer is that this spending surge is itself a capital expenditure race forced upon all industry giants.

If Google doesn't increase spending, Microsoft, Amazon, and Meta will. Capacity and clients will be seized by others. If everyone increases spending, industry-wide capital returns will inevitably be diluted. Google's strategy is to make its cost and capital structures more resilient than competitors', betting that it can outlast rivals even if the race becomes protracted.

Comparing Google with the other three giants clarifies its position in this industry-wide spending spree:

The four companies' combined capital expenditures in 2026 are expected to approach or exceed $700 billion, up more than 70% from about $410 billion in 2025. This figure alone is telling: The entire industry is being driven by the same fear at the same time to do the same thing. Whoever lags risks being eliminated from this AI infrastructure land grab.

Thus, while the market has legitimate short-term fears, it's also understandable why Buffett dares to increase his stake in Google. The current capital spending isn't about burning cash for its own sake but preparing for a highly certain, clearly defined industrial gap with explicit return timelines.

04

Not Putting All Eggs in One Basket

The second-quarter net profit included an extremely unusual line item: Other net income reached $98 billion.

This line item was just $2.7 billion a year earlier, primarily from unrealized gains on equity securities investments. A significant portion of the $99 billion in gains came from the appreciation of Google's stakes in Anthropic and SpaceX.

This gain directly boosted net profit to $112.1 billion, up 298% year-over-year, with diluted earnings per share of $9.11, up 294% year-over-year. By analysts' estimates, $6-$7 of that $9.11 came from this non-operating paper gain. Excluding this one-time benefit, the company's core operating profit still grew at a robust 30% rate.

This detail merits separate discussion: Google hasn't bet all its AI chips on itself but is also a shareholder in cutting-edge AI labs like Anthropic. This serves as a hedge for its AI strategy. If Google's in-house Gemini system lags in some area, Google as a shareholder can still capture a share of the industry's overall AI dividends.

Of course, this gain is highly volatile. SpaceX's stock price fell more than 30% from its year-to-date high after the second quarter ended. In the third quarter, this line item could shrink dramatically or even turn negative. Management specifically warned in the earnings release that fluctuations in the fair value of equity securities will continue to cause significant volatility in non-operating income, and investors shouldn't price such paper gains as sustainable profitability.

05

Google Blames Itself for Miscalculating AI's Costs

When we analyzed the valuation logic of large language model companies, we broke it down as follows: Foundational model capabilities determine commercialization ceilings, commercialization feedback determines willingness to invest in infrastructure (Infra), and Infra investment in turn determines the speed of foundational model iteration. Break any link in this chain, and the entire cycle stalls.

Google's predicament stems from being stuck in the loop: 'Weak foundational model → Unclear commercialization path → Reluctance to invest in Infra.' Management likely overestimated the strength of the consumer market boom in previous quarters while underestimating the monetization potential of its foundational models. Consequently, Google lacked confidence in the 'foundational model-commercialization-Infra' virtuous cycle, forcing it to pay a higher premium to catch up in stages.

Thus, negative free cash flow will likely persist for the next few quarters. Third-party computing usage in the third quarter may further pressure cloud business margins, while integration costs from the Wiz acquisition will continue to weigh on the income statement.