Alphabet (GOOG -2.18%)(GOOGL -2.09%) said something striking on its second-quarter earnings call in July. Even after committing to as much as $205 billion of capital spending this year, the company still can’t build artificial intelligence (AI) computing capacity as fast as customers want it.
“[W]e continue to be supply constrained — a sign of momentum and rapid adoption,” CEO Sundar Pichai said in his remarks on the quarter.
Yet Alphabet has agreed to hand multi-gigawatt blocks of that scarce capacity to a fast-growing outside customer: Anthropic, the AI company behind the Claude models.
And a look at Alphabet’s underlying business performance shows why the company is racing to sell its capacity to major customers like Anthropic — even if it’s scarce.
Image source: Alphabet Inc.
Selling scarce capacity is a great business
Google Cloud, the segment that sells cloud computing to outside customers, grew revenue 82% year over year to $24.8 billion in the second quarter. That was up from 63% growth in the first quarter.
The profit is growing even faster than the revenue. Google Cloud’s operating income more than tripled year over year, from $2.8 billion to $8.8 billion — after reaching $6.6 billion in the first quarter. The segment’s operating margin came in at about 36%, versus about 21% in the year-ago quarter and 33% in the first quarter of this year.
And the contracted work keeps piling up. Pichai said cloud backlog (future revenue from signed contracts) grew to about $514 billion in the second quarter, up from $462 billion at the end of the first quarter. That backlog is now more than four times the revenue Alphabet’s entire business produced last quarter.
How much of it is Anthropic?
Alphabet doesn’t break out the number, but the disclosed pieces — even if they lack financial details — are big. Last October, Anthropic agreed to expand its use of Google Cloud in a deal giving it access to up to 1 million of Google’s tensor processing units (TPUs), the AI chips Google designs in-house, with well over a gigawatt of capacity coming online in 2026. Google Cloud said the agreement was worth tens of billions of dollars.
This spring, the relationship got much bigger. In early April, Anthropic secured multiple gigawatts of next-generation TPU capacity from Google and chip partner Broadcom, coming online starting in 2027 — about 5 gigawatts in all, CNBC reported. Anthropic will access that capacity through Broadcom, according to a Broadcom securities filing. Weeks later, Google agreed to invest up to $40 billion in Anthropic itself, putting in $10 billion right away with as much as $30 billion more tied to performance milestones.
Worth noting from that Broadcom filing, though, is that Anthropic’s use of the expanded capacity “is dependent on Anthropic’s continued commercial success.”
That is the honest risk in this arrangement.
To be fair, Anthropic said in April that its run rate revenue (its recent revenue pace, annualized) had surpassed $30 billion, up from about $9 billion at the end of 2025. Growth like that is extraordinary. But it means a meaningful slice of Alphabet’s contracted future rests on one young AI developer growing into its commitments, and Alphabet is now an investor in that developer on top of being its supplier.
The build-out still has to be paid for
Of course, Alphabet has to build all of this capacity before anyone can rent it. The company raised its 2026 capital expenditures guidance in July to $195 billion to $205 billion.
In the second quarter, capital spending of $44.9 billion exceeded the $39.1 billion of cash its operations produced. And the funding has gone well beyond cash on hand. Alphabet collected $49.6 billion from stock sales in June and issued senior notes (a form of debt) for another $20.3 billion of proceeds during the quarter.
In other words, the company is financing enormous capacity ahead of the revenue it will carry, and pre-selling chunks of it profitably.
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What’s in it for Alphabet? Probably more of the incredible momentum it’s already seeing: Faster cloud revenue growth, a segment margin up from about 21% to about 36% in a year, and a $514 billion pile of signed contracts.
So, there’s a lot to like here. The supply constraint Pichai described is another way of saying Alphabet has pricing power, and the Anthropic agreements convert that scarcity into contracted revenue years into the future — something that should help an already thriving cloud business over the long haul.
And shares trade near $339 as of this writing, at about 23 times next year’s expected earnings, which is arguably a reasonable price for a company growing total revenue by 24% (with an explosive cloud business underneath).
