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Chapter 1: What is the main topic discussed in this episode?
Why does one of the most profitable companies in the world need more money? Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoy. I'm joined today by Lou Whiteman and Tyler Crow. And guys, one of the stranger news announcements this week was that Alphabet announced that they are raising another $80 billion.
What got attention was that $10 billion of that is going to come from Berkshire Hathaway. But as NeoClouds and Oracle and even some of the other hyperscalers are taking on more and more debt to fund this AI build out, which is now moving past the operating cash that they're generating from their business, even Alphabet might pass that in 2026, they need more money.
And Tyler, Alphabet said, hey, we want to sell equity, not debt. So this is just kind of an interesting move from them.
I think there's a little bit of like, we've been watching too many industry and business-related television shows like Succession, where we're thinking like strategy, like how can we really stick it to these other players? But let's be honest, they're just looking at the numbers and being like, we need more money. We're not trying to necessarily beat somebody more so than the other.
The first thing is the bottom line first. And I think this is really the case when it comes to this deal with Google raising $80 billion, because
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Chapter 2: Why is Alphabet raising $80 billion for AI buildout?
Just some rough numbers. I think their current capex is somewhere in like $170 billion range for 2026. 2027 is probably going to be more, and they're bringing in $175 billion in operating cash over the past 12 months. If you're going to obviously do more, you're going to go past your operating cash flow. And I think this is getting ahead of that.
They're obviously probably not going to go $80 billion over in a single year. This is probably like, yeah, let's get a little bit of a cash cushion, get ahead of it. We've got a decently priced stock right now, and this will be a good time to do it.
Chapter 3: What role does Berkshire Hathaway play in Alphabet's funding?
We'll get Berkshire involved. It'll make it a little bit easier. And they've got things like that big anthropic deal that they signed last year. So there is demand for what they want to build.
Yeah, when we look at some of these deals, I mean, Anthropic just raised $65 billion. They're selling several percentages of their company, 6%, 7% of the company to raise that kind of money, Lou. This is 2% of Alphabet. So it's not all that dilutive. And it does keep that flexibility on the balance sheet.
Like Tyler said, I mean, there is debt on the balance sheet, but they still have a net cash balance on the balance sheet. So, you know, is this the kind of thing that you like as those bills for the AI build out keep going up or would you rather have them use debt?
Yeah. Now, Tyler, first of all, two things can be true. OK, this can both be that they need money and they are smiling and waving at SpaceX as they prepare for it. Yeah, this did come before the SpaceX IPO, before we heard, I think, hours afterwards. And it's basically the same amount. Yeah, it's basically the same amount.
I mean, part of it is, it's just like every other company striking while the iron is hot, probably, too, for the excitement around it. But look, I think that they have a compelling story to tell relative to those startups. So why not, you know, get your story out there? I think Tyler said it right.
With very little dilution, this is the time where you do use equity when your stock is highly valued. And so to raise money this way, I think makes sense.
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Chapter 4: How are companies managing debt for AI investments?
Travis, you hit on, I think, maybe the most interesting thing about this. For even, I think, among the best of these companies, even the cash generation machine, last year's bull story is now over. Because last year at this time, all of the spending was justified as it's not 1999 all over again. They can fund this from operations. They can fund this from their cash.
Chapter 5: What are the implications of Alphabet's equity strategy?
That is simply no longer the case. So that's over. The good news is, is that these are massive, well-capitalized companies that have a lot of options. So it's not like, I'm not trying to say the sky is falling. I do have questions, but you know, I think this is the smart move is that look, this is really, really expensive. Strike while it's hot.
All right, pop quiz. Out of the hyperscalers that are spending hundreds of billions of dollars on this AI build-out, in the neoclouds, what is the one other company that has a net cash balance? Do you guys know?
Hmm.
It is Microsoft. The only other one of these companies. Amazon, net debt of about $67 billion. And then obviously all the neoclouds, Nebius, CoreWeave, Iron, they're all Oracle, a ton of debt. So debt is really fueling most of this. This is going to put Alphabet in a very different position. Tyler, what does this say about the return on investment that they're potentially seeing?
And this is one of the things I think we... We're kind of trying to draw conclusions that are hard to draw today because you look at the GCP numbers within Google Cloud. Those are phenomenal. But the $180 billion that you mentioned that they're spending this year to do this AI build out. very little of that is actually contributing revenue today.
It's gonna be next year, the year after, if token prices start to come down, which they've actually gone up recently, the economics could change. So what does this at least indicate about what they're seeing about the ROI for the business?
I feel like that's a great question. I don't have a great answer to. I'm kind of throwing out into the wind here. But that's the case with all of AI, right? We can see some tangible benefits. I mean, here at Motley Fool, using Claude and ChatGPT and several other products much more prominently in our kind of everyday workflows. So we see the use cases.
However, the economics of what those businesses are doing is a little bit questionable. For the hyperscalers, one thing that you can at least rely on to a certain degree is companies like Anthropic are pledging large amounts of money to them for renting this stuff. And just to use the SpaceX example that you were mentioning earlier –
As part of the S1 for SpaceX, that deal actually said that Anthropic is going to pay them, I think it's $1.25 billion a month for compute power. And so it shows there is a monetizable way of doing this. And it's not just some, hey, we don't really know what it's going to work with. There are actual revenue numbers you can put behind the compute. And so...
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