Deprecation & Cloud Margin Compression

**Large Capex Increase Overview** \-This earnings season Meta and Alphabet both released shockingly high Capex numbers. Both companies are forecasting to be spending vastly more money than they are taking in. Meta \~130 billion and Google \~180 billion \-For this write up I am mostly going to be talking about google as I am a shareholder. The large capex with questionable returns is starting to worry me especially with Google's multiple expansion to 33x earnings. **Cash Flow Considerations** \-Alphabet will likely have operating cashflow (\~160b) below the level of capex they are forecasting. (Also taking into consideration the dividend costs 10b annually) The high Capex means that the company will inevitably have to issue debt and reduce buybacks. This means the share count for Alphabet will increase as Alphabet has notoriously high SBC (\~25b). Thus I estimate that Alphabet will take on 30-60 billion in debt to finance the capex for FY 2026. **Depreciation Term** \-Google's deprecation term of 6 years for AI GPU's and related items . But not all capex depreciates at this rate. From last year's capex I found that the average deprecation was \~10 years. Using the capex (91b) divided by the increase in depreciation (2.2b) divided by 4 quarters. So I’ll assume this number for depreciation term stays constant with the doubling of capex to 180b. **Depreciation & Debt on Net Income** The effects of the depreciation expense of the forecasted Capex of this year will be \~4.35b a quarter Q1 2027. Also adding in the cost of debt assuming the google uses debt for all financing (not diluting using SBC). This gives about 60 billion in debt issuance. The current bond yield is almost risk free for google, so at a rate of 5% this would cost .75b a quarter. This gets a quarterly cost of about 5.1b in Q1 2027.  **Considerations** \-This 5.1b increase would be roughly the same increase we saw in this latest earning release in YOY operating earrings growth. This has me questioning whether this capex accelerates growth to justify the cost. Google needs to cover the cost of the depreciation and interest cost while also providing a return on investment. This compounding deprecation cost is becoming a large line item on once an asset light company. \-The Google Cloud(GC) growth is very encouraging and shows that the capex is being put to use with 49% growth in the segment. The backlog had increased to 240b—an incredible number. \- A concern that is a whole topic in itself is oversaturation of the market. With AI startups burning cash for cloud compute and cloud providers with insane capex for Azure and GC and likely AWS there could be an oversupply once the AI market thins out. Microsoft, Google, and Amazon *NEED* cloud to drive growth. For Amazon half of profit comes from it. This creates a dangerous situation where pricing power could eventually deteriorate as companies fight for utilization in an inevitable slow down.  \-All this to say I might trim back some Alphabet shares after this heck of a run. This little write up is just the tip of the iceberg—these projections are getting outside my wheelhouse. The value estimations were much easier a year ago when I bought Google. Now I just have no idea how the price can be justified and the future drivers of growth given the multiple expansion.  Anyhow, what are your thoughts on this?