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Chapter 1: Why did Google raise $85 billion despite having ample cash?
welcome back to the rundown for another weekend deep dive today we are talking about google and the record-breaking 85 billion dollar stock sale this is the largest stock sale in history and it's coming from a company that's already sitting on 127 billion dollars in cash so why is one of the richest companies on the planet selling its own stock for the first time in 20 years
Well, in this episode, we're going to break down what Google actually did, why other big tech companies might be next in line, and what this raised signals about the AI trade moving forward. We got a great one for you today. Let's dive in. On June 1st, Google announced plans to raise $80 billion by selling their own stock and using that money to fund their AI infrastructure build-out.
And when this news came out, it shocked a lot of people on Wall Street and Silicon Valley. See, Google is one of the most profitable companies on the planet. Last year, the company made $165 billion in operating cash flow, and they already have about $127 billion in cash. So why is Google selling $80 billion worth of their stock and diluting existing shareholders?
We'll get into the reasons a bit later. But first, I want to do a quick finance 101 on how companies raise money, because it's the key to understand this whole story. See, When a company needs money, there are three options that they have. The first option is just to use their own cash that they have sitting in the company's bank account. This one is pretty self-explanatory.
Option two is borrowing the money by issuing debt. In the corporate world, this usually means selling bonds. Now, a bond is basically an IOU. Bond investors hand the company cash today, and the company pays the bondholders interest every year. And then at the end of the term, the company pays back the money in full.
The maturity of corporate bonds can range from one year all the way up to 30 years. And typically, a company like Google with a pristine credit rating and a robust business usually borrows money because it's cheap for them. They can issue bonds at some of the lowest rates of any company on earth because bondholders know that they'll likely get their money back. But Google decided not to do that.
They went with the third and usually last option a company does if they need money. They decided to issue more stock. See, most companies don't want to do this because it dilutes existing shareholders. With more shares being created, each existing share is worth a smaller piece of the company and shareholders don't like that.
So that's why selling stock is usually the last resort when a company needs money. Typically, the companies that sell stock are like startups burning cash or struggling companies that can't borrow. Google is obviously neither, which is why this stock sale was so shocking from them. In fact, this is Google's first stock sale since 2006 when they raised a cute little $2.1 billion.
But look, the market didn't seem to mind too much. In fact, the demand for Google stock sale was so hot that Google actually upsized the deal from $80 billion to nearly $85 billion. This also makes Google the largest stock sale in history of capital markets. The old record was roughly a $70 billion stock sale by the Brazilian oil giant Petrobras back in 2010.
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Chapter 2: What are the options companies have to raise money?
increasing their compute capacity, the more money Google will make from their AI businesses like Google Cloud and Gemini. To be fair, there are some downsides from spending all this money. The first one is kind of a sneaky downside. It's depreciation.
See, when you buy $180 billion worth of AI chips and server data and data center buildings, accounting rules don't let a company expense all that at once. You have to spread that expense across your income statement over several years. So even after Google's CapEx spending slows down, the expenses will keep showing up quarter after quarter for years to come.
Analysts are already flagging 2027 as a potential air pocket year for Google's earnings, where the depreciation bill from all that spending will hit the income statement before all the revenue arrives. So Google's earnings in 2027 could appear weak until the revenue catches up down the line. But look, that's more of an accounting thing, and it's probably not keeping most investors up at night.
The big concern that everybody has from all this spending is the risk of overbuilding. People are starting to make the reference of how the The AI boom today is similar to the dot-com boom of the late 90s. Back in the late 90s, telecom companies spent tens of billions of dollars laying fiber optic cable in preparation for the internet boom.
The problem is they ended up overbuilding and the demand didn't come on as fast as they expected. So many of these companies ended up going bankrupt as a result. But here's what makes the AI version of this even riskier. The fiber that was put in the ground stayed useful for decades to come. We ended up using it as the internet demand picked up. But AI chips don't age like fiber optic cable.
A cutting edge AI chip today is basically obsolete in five to six years. So if Google and other big tech companies overbuild, they don't end up with a warehouse of future capacity. They end up with a building full of outdated chips that need to be replaced. So that's the real tension here.
The demand for AI is real, but will that demand continue to grow at the rate that justify all the borrowing and the rush to build? Big tech companies clearly think the demand will be there. And within days of Google's stock raise, there were reports that other big tech companies were considering doing the same. So let's talk about it.
Google spending all this money on CapEx is just one slice of the AI spending picture. The four biggest hyperscalers, Amazon, Microsoft, Meta, and Google are expected to spend more than $700 billion combined on CapEx this year. And every one of them is staring at the same math problem. The AI bill has outgrown their cash flows.
So when Google announced that they were raising 80 plus billion dollars by selling their own stock and saw a ton of demand, I'm sure the rest of the hyperscalers took note of that. In fact, the Financial Times is now reporting that Meta is weighing doing its own stock offering and that the discussions intensify specifically because Google's offering went so well.
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