Ad Machine Funds the AI Race: Alphabet Bonds Yield Up to 6.05%

Alphabet is the parent company of Google and reports across three segments: Google Services, Google Cloud, and Other Bets. Google Services is the group's core business, encompassing Search, YouTube, Android, Chrome, Google Play, Maps, and Gmail. Most of its revenue comes from advertising, sold predominantly on a cost-per-click or cost-per-impression basis across Search, the Google Display Network, and YouTube. This is supplemented by a growing subscriptions business - YouTube Premium and TV, Google One, NFL Sunday Ticket - and device sales. Google Cloud provides enterprise infrastructure and platform services (Google Cloud Platform), productivity and collaboration tools (Google Workspace), and AI infrastructure and generative AI solutions. It earns revenue primarily on a consumption and subscription basis, alongside product sales of Alphabet's custom Tensor Processing Units (TPUs). Meanwhile, Other Bets is a collection of early-stage, individually immaterial businesses - principally Waymo's autonomous ride-hailing service - that remain loss-making but strategically adjacent to Alphabet's core AI and infrastructure capabilities.

Google Cloud has moved from a break-even business a few years ago to Alphabet’s fastest growing and increasingly profitable segment. With enterprise AI infrastructure and Gemini Enterprise adoption both accelerating, Google Cloud has become the primary lens through which investors are pricing Alphabet’s AI investment cycle.

Growth from Cloud, Cash from Services

Alphabet’s growth has accelerated sharply through 2026. Consolidated revenue rose 24.2% YoY to US$119.8 billion in 2Q2026, marking its 12^th consecutive quarter of double-digit revenue growth. As shown in Figure 1, the mix continues to shift toward Google Cloud. With AI infrastructure and AI solutions layered on top of core Google Cloud Platform demand, revenue grew 81.8% YoY to US$24.8 billion, taking its share of consolidated revenue to 20.7%. Google Services remains the much larger segment (78.9% of total revenue), growing a healthy 14.5% YoY to US$94.5 billion. The remaining 0.3% came from Other Bets, which reported slight growth of 2.4% YoY to US$382 million.

Google Cloud's revenue backlog stood at US$513.9 billion as of 2Q2026, up sharply from US$106 billion a year earlier, although the comparison is affected by a change in Alphabet's backlog reporting methodology in 1Q2026. Management expects to recognise just over half of the backlog as revenue over the next 24 months. The scale of this contracted demand also supports Alphabet's continued increase in 2026 capex as it accelerates capacity additions amid an environment where demand continues to outpace supply.

Figure 1: Alphabet Revenue by Segment (2Q2025 vs 2Q2026)

Source: Company financials

Alphabet's total operating income grew 30.4% YoY to US$40.8 billion in 2Q2026, outpacing the 24.2% rise in revenue and lifting consolidated operating margin to 34.0%, from 32.4% a year earlier. The driver is squarely Google Cloud, where segment operating income more than tripled - up 211.9% YoY to US$8.8 billion - taking Cloud's own margin from 20.7% to 35.6%, a 14.9 percentage-point improvement in a single year. As AI and data-centre capacity is deployed and monetised, Google Cloud is demonstrating strong operating leverage, with incremental revenue converting into profit at a high rate despite Alphabet’s initial heavy infrastructure investment.

Google Services remains the group’s profit engine in dollar terms, contributing US$39.5 billion of operating income, representing a 19.6% YoY increase. Its operating margin improved more modestly, from 40.1% to 41.8%. However, two items worked against the blended margin. Other Bets’ operating loss widened 44.4% YoY to US$1.8 billion, a deeply negative margin against its small revenue base, still largely Waymo-related investment. Meanwhile, unallocated Alphabet-level costs, mostly shared AI research and development, grew 71.7% YoY to US$5.8 billion, making it the fastest-growing cost line in the group. Net-net, Cloud’s improving profitability is more than offsetting both drags, and this increasingly looks less like a one-off efficiency push and more like the natural consequence of Cloud taking a larger share of the business.

Capex Overtakes Cash Generation

Like other megacaps such as Amazon and Meta, Alphabet has sharply increased its spending on AI infrastructure, and capital intensity has stepped up alongside Cloud's growth. Operating cash flow eased for two consecutive quarters, from US$52.4 billion in 4Q2025 to US$45.8 billion in 1Q2026 and US$39.1 billion in 2Q2026. The softening coincided with a growing working-capital drag as the business scaled, rather than any weakening in underlying profitability. Inventory absorbed US$7.7 billion of cash in the six months ended June 2026, compared with just US$0.6 billion a year earlier, while accounts receivable absorbed US$6.9 billion (1H2025: US$1.2 billion) and other operating assets a further US$10.0 billion (1H2025: US$2.1 billion). Despite these outflows, six-month operating cash flow still rose 32.8% YoY to US$84.9 billion, from US$63.9 billion in 1H2025.

Quarterly purchases of property and equipment doubled YoY, from US$22.4 billion in 2Q2025 to US$44.9 billion in 2Q2026. On a six-month basis, the increase was similarly sharp, with capex more than doubling from US$39.6 billion in 1H2025 to US$80.6 billion in 1H2026, up 103.3% YoY. Capex has consequently absorbed an increasingly large share of operating cash flow: the capex-to-operating-cash-flow ratio rose from around 81% in 2Q2025 to 115% in 2Q2026, and from 62% in 1H2025 to around 95% in 1H2026. This pushed quarterly free cash flow negative for the first time in Alphabet's history as a listed company, at negative US$5.9 billion in 2Q2026. On a trailing-twelve-month basis, free cash flow remains positive at US$53.3 billion, but with 2026 capex guidance raised to US$195–205 billion and further increases expected in 2027, free cash flow is likely to remain under pressure as Alphabet continues to invest heavily in technical infrastructure.

Table 1: Quarterly Free Cash Flow

Funding the Build

Alphabet has funded that spending through a step-change in debt issuance and a large equity raise. The company priced US$20 billion of bonds in February, attracting roughly US$103 billion of demand, and subsequently issued notes in Swiss francs, British pounds, euros, Canadian dollars and Japanese yen, taking first-half debt sales above US$50 billion. In early August, Alphabet returned with a further US$25 billion of investment-grade bonds, where more generous than usual concessions helped drive demand to roughly US$115 billion - one of the largest order books for AI-related debt this year. The company also made its debut in the Australian dollar market raising A$5.5 billion (US$3.9 billion) across 3-, 5-, 10-, and 20-year tranches. The 20-year tranche priced at a yield of 6.98%, represents Alphabet’s highest-ever coupon. Together, these transactions have made Alphabet the biggest seller of AI-related bonds since the start of 2025 (see Figure 2). Alongside its debt issuance, Alphabet raised US$49.6 billion of net equity proceeds in June as part of an equity capital raise initially announced at US$80 billion and subsequently upsized to US$84.75 billion. A further US$40 billion ATM programme remained undrawn as of 30 June 2026.

Figure 2: Debt Raised Since 2025 (Alphabet vs Peers)

Source: Bloomberg
Data as of 6 August 2026 (excludes AUD issuance in mid-August)

Balance Sheet: Net Cash Through the Ramp

Alphabet's reported debt, including operating lease liabilities, has grown quickly. As of end-June 2026, total debt stood at US$118.2 billion, nearly triple the US$39.6 billion a year earlier, while total assets grew 83.6% YoY to US$922.0 billion (see Table 2). Because debt expanded faster than the asset base, total debt-to-total assets rose from 7.88% to 12.82%. Total equity grew 76.5% YoY to US$640.5 billion, and despite the additional debt taken on. Net debt rose from US$18.5 billion to US$62.3 billion, as the pace of borrowing outstripped the build-up in cash on hand, taking net debt-to-equity from 5.11% to 9.73%.

Reported debt, however, only captures part of Alphabet's future cash obligations. Expected future fixed or guaranteed commitments under contracts with remaining terms beyond one year stood at US$707.0 billion as of 30 June 2026, roughly six times reported debt. The significant majority relate to long-term supply agreements securing production capacity for technical infrastructure and inventory components, with the balance comprising energy service agreements for data centre usage and content licensing agreements. Most supply and content commitments are expected to be fulfilled through 2030, while the energy agreements run considerably longer, with terms of two to 26 years and obligations extending to 2054.

EBITDA rose 24.3% YoY to US$172.9 billion, driven by the 21.6% YoY growth in operating income to US$147.6 billion. However, earnings growth was not enough to offset the pace of borrowing, pushing total debt-to-EBITDA from 0.28x to 0.68x. With 2026 capex guidance raised and spending expected to increase significantly again in 2027, free cash flow is likely to remain under pressure.

Table 2: Balance Sheet and Leverage Metrics

	As of end 2Q2026	As of end 2Q2025
Total Debt [1] (USD millions)	118,201	39,566
Total Assets [2] (USD millions)	921,983	502,053
Total Debt / Total Assets [1/2] (%)	12.82	7.88
Cash [3] (USD millions)	55,911	21,036
Net Debt [4, 1-3=4] (USD millions)	62,290	18,530
Total Equity [5] (USD millions)	640,480	362,916
Net Debt / Total Equity [4/5] (%)	9.73	5.11
EBITDA [6] (USD millions)	172,865	139,045
Total Debt / EBITDA [1/6] (x)	0.68	0.28
Source: Company financials Data as of 30 June 2026

Interest expense rose more than fivefold to US$2.3 billion, from US$402 million a year earlier, as higher-coupon 2025–26 issuance layered on top of Alphabet's legacy sub-2.25% notes. Interest coverage consequently fell to 65.6x from 301.9x. Even so, operating income still covers interest expense more than sixty times over, leaving substantial headroom despite the deterioration.

Table 3: Interest Coverage

	TTM (as of end 2Q2026)	TTM (as of end 2Q2025)
Operating Income [1] (USD millions)	147,628	121,370
Interest Expense [2] (USD millions)	2,252	402
Interest Coverage Ratio [1/2] (x)	65.55	301.92
Source: Company financials Data as of 30 June 2026

Overall, Alphabet's credit profile remains strong, supported by its dominant core businesses, growing contribution from Google Cloud, and substantial liquidity. However, the balance sheet is becoming more aggressive as the company ramps up AI and data-centre investment. Debt issuance has accelerated, leverage is trending higher and free cash flow is under increasing pressure as capex outpaces internally generated cash. These trends are unlikely to reverse in the near term, although Alphabet still retains considerable financial headroom.

Alphabet has a broad curve of outstanding USD bonds (Tables 4 and 5). Relative to comparable US Treasuries, these offer a yield pickup of roughly 49 – 77 bps across tenors from 5 - 24 years, which we view as fairly priced.

Against Amazon (AA / A1 / AA-), rated one to two notches lower, Alphabet yields broadly in line through the front and intermediate parts of the curve, before trading meaningfully inside Amazon further out, with GOOGL 4.500% 15May2035 at 5.24% against AMZN 4.650% 20Nov2035 at 5.44%, a 20 bps give-up reflecting Alphabet's higher rating and stronger net cash position. Against Meta (AA- / Aa3 / -), also rated one to two notches lower, Alphabet yields less across comparable maturities, with the differential generally widening with tenor from 10 bps at five years to 56 bps at nine years. Against MSFT 4.200% 03Nov2035 Corp (USD) (AAA / Aaa / -), rated one to two notches higher, Alphabet yields more, offering a pickup of 31 bps at nine years. On balance, we view Alphabet as fairly priced within the peer group: the higher yields available from Amazon and Meta are consistent with their weaker credit profiles, while Microsoft's tighter pricing reflects its AAA rating.

For investors comfortable with duration risk, the GOOGL 2.050% 15Aug2050 (AA+ / Aa2 / -) offers a yield-to-worst of 6.05%, a pickup of 77 bps against comparable US Treasuries, over a tenor of approximately 24 years. As compared to peers, AMZN 2.500% 03Jun2050 Corp (USD) (AA / A1 / AA-) offers a yield-to-worst of 6.26% (-21 bps) and META 4.450% 15Aug2052 Corp (USD) (AA- / Aa3 / -) yields 6.87% (-82 bps) - both trade wider than GOOGL, consistent with their lower credit ratings. Against MSFT 2.500% 15Sep2050 Corp (USD) (AAA / Aaa / -), which yields 6.02% (+3 bps), the picture flips. GOOGL trades marginally wider despite sitting one to two notches below Microsoft on the rating scale. The issue is available on Bondsupermart Live and can be traded with a minimum order size of US$2,000 and increments of US$1,000. Investors should note that at this tenor, the price can fluctuate significantly and is best suited for investors looking to trade instead of holding to maturity.

Table 4: Peer Comparison

Issuer	Issue	Ask Price (USD)	Yield to Worst (%)	Years to Maturity	Credit Ratings (S&P / Moody’s / Fitch)
Alphabet Inc	GOOGL 4.875% 15Aug2031 Corp (USD)	99.62	4.96	4.99	AA+ / Aa2 / -
Alphabet Inc	GOOGL 4.375% 15Nov2032 Corp (USD)	96.55	5.03	6.24	AA+ / Aa2 / -
Alphabet Inc	GOOGL 5.200% 15Aug2033 Corp (USD)	99.84	5.23	6.99	AA+ / Aa2 / -
Alphabet Inc	GOOGL 4.500% 15May2035 Corp (USD)	94.87	5.24	8.74	AA+ / Aa2 / -
Amazon.com Inc	AMZN 4.800% 09Jul2031 Corp (USD)	99.32	4.96	4.89	AA / A1 / AA-
Amazon.com Inc	AMZN 4.700% 01Dec2032 Corp (USD)	98.58	4.96	6.29	AA / A1 / AA-
Amazon.com Inc	AMZN 5.100% 09Jul2033 Corp (USD)	99.14	5.25	6.89	AA / A1 / AA-
Amazon.com Inc	AMZN 4.650% 20Nov2035 Corp (USD)	94.33	5.44	9.26	AA / A1 / AA-
Meta Platforms Inc	META 4.550% 15Aug2031 Corp (USD)	97.77	5.06	4.99	AA- / Aa3 / -
Meta Platforms Inc	META 4.600% 15Nov2032 Corp (USD)	96.28	5.31	6.24	AA- / Aa3 / -
Meta Platforms Inc	META 4.875% 15May2033 Corp (USD)	96.77	5.45	6.74	AA- / Aa3 / -
Meta Platforms Inc	META 4.875% 15Nov2035 Corp (USD)	93.44	5.80	9.24	AA- / Aa3 / -
Microsoft Corp	MSFT 4.200% 03Nov2035 Corp (USD)	94.64	4.93	9.21	AAA / Aaa / -
Source: Bloomberg and Bondsupermart Data as of 21 August 2026

Table 5: Long-Dated Peer Comparison

Issuer	Issue	Ask Price (USD)	Yield to Worst (%)	Years to Maturity	Credit Ratings (S&P / Moody’s / Fitch)
Alphabet Inc	GOOGL 2.050% 15Aug2050 Corp (USD)	49.75	6.05	23.99	AA+ / Aa2 / -
Amazon.com Inc	AMZN 2.500% 03Jun2050 Corp (USD)	53.80	6.26	23.79	AA / A1 / AA-
Meta Platforms Inc	META 4.450% 15Aug2052 Corp (USD)	70.88	6.87	25.99	AA- / Aa3 / -
Microsoft Corp	MSFT 2.500% 15Sep2050 Corp (USD)	55.59	6.02	24.08	AAA / Aaa / -
Source: Bloomberg and Bondsupermart Data as of 21 August 2026

Disclosure: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in GOOGL 4.500% 15May2035 Corp (USD), GOOGL 2.050% 15Aug2050 Corp (USD), META 4.550% 15Aug2031 Corp (USD), and MSFT 2.500% 15Sep2050 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.