Alphabet Is Selling the Chips Behind Its Cloud Boom, and the Cash Is Stuck in Inventory

At the end of 2025, Alphabet carried $2.4 billion of inventory. Nine months later it carried $13.3 billion. The shelves filled first. That $10.9 billion buildup is TPU systems not yet sold, hardware assembled for customers who have signed agreements but haven’t taken delivery, and on Wednesday night, after Alphabet reported the quarter that produced it, the company’s shares fell about 10% in after-hours trading, a drop Reuters put at nearly $400 billion of market value.

Kurian, the Google Cloud chief making his first appearance on an Alphabet earnings call, described the product as a full system rather than a component: hardware, compute, storage, networking and software sold together for training and running AI models. Nearly 100 customers use TPUs today. Alphabet has recently entered partnerships to deliver TPU systems with Crux AI and Oracle, with more in the works. Apple is scaling pretraining of its foundation models on the latest generation of TPUs, and Alphabet worked with Meta on software that lets PyTorch users train and serve models on them. The customer list is the point. Alphabet spent years building these chips for its own data centers, and this quarter it sold them like a vendor.

$35.1 billion of other cost of revenues in the quarter, up 32% from a year earlier, shows where that vendor business lands in the accounts. Anat Ashkenazi, Alphabet’s chief financial officer, said the increase was driven by hardware costs primarily related to TPU system sales, alongside depreciation and the cost of running technical infrastructure. Cloud revenue still more than doubled, to $30.7 billion, and cloud operating income more than tripled, to $11.1 billion, lifting the unit’s operating margin from 23.7% to 36.2%. Ashkenazi added one timing detail. The third-party bridging capacity Alphabet rented to meet demand came online only at the very end of the quarter, so it barely touched the result, and she expects margin headwinds in the near term as its use ramps up in the fourth quarter. Cloud growth excluding TPU systems was, in her words, again incredibly strong.

Ashkenazi named the two things that dented operating cash flow, which came in at $42.3 billion for the quarter. One was the inventory buildup for TPU system sales. The other was a $5.2 billion cash payment for a 2018 European Commission fine, paid after the appeal process concluded. Capital spending of $51.4 billion in the quarter, about 65% of it on servers and networking equipment, then took free cash flow to negative $9.1 billion, the second straight negative quarter after the first in the company’s 22 years as a public company came in the second quarter. The sequence is the business model, and Ashkenazi explained it on the call as a different cycle of cash flow generation: Alphabet signs an agreement, the order shows up in backlog, the company builds the inventory, and only on delivery and billing does the cash come in.

Behind the shelves sits a $561 billion backlog, most of it typical cloud contracts, of which Alphabet expects to recognize just over 55% as revenue over the next 24 months. That is about $309 billion on its own arithmetic, or roughly ten quarters of cloud sales at the third quarter’s pace. The company also disclosed future purchase commitments of $924 billion plus pre-commencement leases and other obligations of $152 billion, a combined $1.08 trillion that Ashkenazi stressed reflects maximum contractual obligations, with variable pricing and volume flexibility that could bring the spend lower. TPU system sales are expected to keep scaling in the fourth quarter, with a meaningful revenue ramp in 2027, and full-year capital spending guidance of $195 billion to $205 billion was left unchanged, with a significant increase expected in 2027.

Operating income rose 30% to $40.6 billion on revenue of $127.6 billion, up 25%. Net income available to common stockholders fell 25% to $26.2 billion, or $2.12 per share, because other income swung to a net expense of $8.2 billion, driven primarily by an unrealized loss on Alphabet’s investment in SpaceX as its stock price fell in the quarter. Search revenue grew 12% to $63.3 billion, down from 17% the previous quarter, while query growth was the highest in five years. Philipp Schindler, the chief business officer, gave the deceleration four drivers in order: foreign exchange was the single largest, then APAC advertisers hit by the European Union ending its de minimis exemption, then media and entertainment spending normalizing after a World Cup quarter, then lower monetization in AI Mode queries. Afterwards, analysts at Bernstein asked in a note, “Did Google rush the deployment of Gemini 4 models as an offset to softer financial metrics? And are the models ready for commercial deployment?”

Google Cloud now counts 18 product lines with more than $1 billion each in annual revenue. Other Bets, which includes Waymo, took in $372 million in the quarter against a $2 billion operating loss.