Google GOOG 0.00%↑GOOGL 0.00%↑ is further along the AI spending curve than anyone. Long-term debt has climbed to nearly $100B, with another $85B in funding through an equity raise. Free cash flow went negative as roughly $200B a year in CapEx is going out the door, with FY27 guided for even higher spending. The justification is a backlog north of $500B waiting to convert into revenue. But a company burning cash to build capacity while sitting on half a trillion in committed demand would be pulling every lever to convert some of it now. Google is choosing to finance instead, and it’s what made me think about what the backlog is really for.
Wait, Why Wouldn’t It?
Cloud revenue grew 82% this quarter, which I expected in my June paid article, so the direction isn’t a surprise. Clearly there’s demand, and clearly it’s converting some of the demand into revenue. Google is building ahead of orders, and $200B a year against half a trillion in signed demand is therefore defensible.
But when you look at what it’s doing rather than what it’s saying, it doesn’t quite add up. There’s something going on.
Neoclouds exist for exactly the problem Google described on its earnings call. Neoclouds provide capacity either today or much sooner. Their entire business is filling the gap when a company can’t build fast enough. Management mentioned working with them for near-term needs on the call, but isn’t in a hurry.
A company financing at this scale with this much booked demand would be signing every neocloud contract available and converting backlog into revenue while the balance sheet is under pressure. Google isn't doing it.
The question is why.
The Funding Math
Free cash flow is now negative, with CapEx guided for near $200B this year, with FY27 set for “meaningful growth.” Long-term debt is near $100B with more bond issuances to come. And the depreciation from everything already built hasn’t fully flowed through the income statement yet, placing significant expense growth in the coming quarters, further pressuring free cash flow. In other words, the organic ability to fund CapEx will be choked further.
Google is net cash positive today, though the pace it needs to spend at doesn’t leave much time before it isn’t. Whether Google can spend at this pace long enough is a different question, and the answer depends on how fast the revenue arrives.
The simple answer to pull in the revenue is to get as much capacity active now. This is where neoclouds come in. But management said while it’s signing some contracts, it’s not rushing in that direction. With $500B and mounting debt, any other company would jump at the idea.
But it’s not.
The True Intentions For The Backlog Answer
If it’s not, it means the backlog isn’t for the purpose bulls, or even bears, think it’s for. Google’s management has a different objective for it, and it’s not about converting it.
I dive into the answer in the paid article here, which provides Google’s actual intentions for the backlog and the ultimate goal for capacity. And the goal, if achieved, would make the backlog insignificant in the grand scheme of things.
Free readers of my Substack who are Seeking Alpha paid subscribers can read my Google article here.
Oh the goal, the fundamentals, etc. and the stock price are two different things. The setup I have on Google looks highly probable.
lots of negativity circling GOOGL recently.. maybe CEO change maybe AI breakthrough maybe just converting the backlog it will find a level to bounce from sooner or later and has a good chance to excel