Summary of Key Points
At the beginning of 2026, Google CEO Sundar Pichai acknowledged that there are "irrational elements" in the AI market. However, Warren Buffett took the opposite approach, increasing his stake in Google from $4.3 billion to $31 billion (making it his third-largest holding). Google's second-quarter financial results were impressive: revenue increased by 24%, its cloud business grew by 82%, and net profit soared by 298%. Nevertheless, the stock price fell by 7% due to the upward revision of annual capital expenditure forecasts from $180-190 billion to $195-205 billion (with further increases expected for 2027). The core issue at stake is whether Google's investment in AI represents a "bubble" or a necessary strategic move.
Disagreements Among the Three Parties: Pichai Says It's a Bubble, Buffett Increases His Stake, and the Market Falls – Who Is Really “Clear-Sighted”?
- Pichai’s View on a Bubble: He doesn’t mean Google specifically but rather the industry’s excessive spending. While Pichai does not deny the value of AI, he points out that some companies are throwing money at things without understanding the actual demand (for example, purchasing large amounts of GPUs they don’t need). Google’s investments, on the other hand, are targeted and aimed at addressing capacity gaps to ensure it can meet growing orders.
- Buffett’s Investment Decision: Having avoided tech stocks for decades, Buffett decided to buy into Google due to two key factors: first, the significant growth in its cloud business (82% revenue increase), and second, the strength of its search platform, which benefits greatly from the thriving digital advertising market. He views current capital expenditures as an investment in the company’s future.
- The Market’s Reaction: Investors are concerned that increased capital spending will lead to reduced short-term profits, prompting them to sell their shares. However, this is more a short-term concern; in the long run, Google is positioned to gain a competitive advantage in the AI era.
Google Cloud: Leading the Pack but with Weak Foundations and Capacity Constraints
Google Cloud has made remarkable progress in recent years, turning from annual losses to a 35.6% profit margin with a 82% growth rate (compared to AWS’s around 15%). However, it faces significant challenges:
- Market Share: With only 13% of the market share, it lags far behind AWS (30%) and Azure (25%). Even with rapid growth, its overall size is still insufficient.
- Capacity Issues: It has a backlog of orders worth $500 billion, half of which need to be fulfilled within two years. Customers are spending more than expected, forcing Google to rent additional computing resources from third parties; it even had to reject capacity requests from Meta, which had to limit its AI usage.
In simple terms, Google Cloud is like a newly popular restaurant with too few tables to serve all the customers – it needs to expand quickly.
Search Business Growth: More Stable than AI
The search business grew by 17% in the second quarter, but this growth is not solely due to AI:
- Economic Cycle Benefits: The digital advertising market is booming (expected to grow by 9.5%-11% in 2026), with events like the World Cup and Winter Olympics boosting ad demand.
- The Impact of the World Cup: YouTube’s World Cup-related content attracted 1.7 billion viewers, leading to a 32% increase in U.S. revenue (far exceeding other regions).
AI plays a supporting role by enabling more detailed searches and creating more advertising opportunities, but without a thriving industry and major events, growth would not be so significant.
Increased Capital Expenditure: Not Waste, but a Necessary Investment
Google has increased its capital expenditure to nearly $200 billion, equivalent to its entire 2016 revenue. The reasons are clear:
- Competitive Edge: Without investing in capacity, Google risks losing customers to companies like Microsoft and Amazon.
- Long-Term Cost Reduction: By developing its own TPU chips and building data centers, it aims to reduce the cost per unit of computing power, making it more competitive compared to competitors that still rely on purchased GPUs (such as Microsoft).
- Industry Competition: Microsoft, Amazon, and Meta together spent over $700 billion in capital expenditure in 2026 (a 70% increase). Failing to invest would put Google at a disadvantage in this AI-driven arms race.
Net Profit Growth: A Mix of One-Time gains and Core Business Momentum
Net profit surged by 298%, but $98 billion of that came from investments in Anthropic and the appreciation of SpaceX’s stock (one-time gains). The actual core profit only increased by 30%. This shows that Google has diversified its investments:
- While working on its own Gemini model, it also invests in companies like Anthropic, ensuring it can benefit from industry trends even if its AI efforts lag. However, the appreciation of SpaceX’s stock (which fell by 30% in the second quarter) indicates that these gains may not be sustainable.
What Exactly is Google Betting On?
Google’s current focus is on catching up with the industry’s rapid development. It previously underinvested in AI but now needs to invest heavily in capacity due to surging demand and fierce competition. Short-term profits may suffer, but in the long run, this investment will give it a significant say in shaping the AI infrastructure. Buffett’s investment, Pichai’s concerns about a bubble, and market skepticism reflect different perspectives on short-term costs and long-term benefits. Buffett is betting on the long term, while investors are worried about immediate losses; Pichai is calling for caution, but Google must still make the necessary investments to stay ahead in the AI race.