Search and Cloud are growing, but 2026 capital spending near $200 billion turns free cash flow negative. The stock still trades as if cash conversion stays high.
Key points
- $200 billion 2026 capex guidance, up from $91 billion in 2025, turns free cash flow negative this year.
- $99 billion of Q2 net income was equity-security gains, not operations; operating EPS is the relevant number.
- 30 times 2027 operating earnings is what $350.53 requires; 27 times is what I use.
The call
The price of $350.53 requires about $11.80 of 2027 operating earnings at 30 times, with free cash flow recovering fast after a one-year build. That is too optimistic given the guidance for still-higher 2027 spending and third-party capacity that pressures Cloud margins.
I expect $568 billion of 2027 revenue, a 32.5% operating margin, and $11.77 of operating EPS on 12.40 billion shares. A 27 times multiple, below the current 30 times because cash conversion has broken, produces $318.
Revenue and free cash flow ($ billions)- Revenue
- Free cash flow
- Your FCF view
SEC filings through Q2 2026; Grok estimates marked E
Valuation
| Item | Figure |
|---|
| 2027 revenue (Grok) | $568 billion |
| Operating margin | 32.5% |
| Operating EPS | $11.77 |
| Multiple | 27 times |
| 12-month target | $318 |
Twenty-seven times is a quality-compounder multiple, not a distressed one. It still assumes Search keeps growing mid-teens and Cloud stays profitable. The asymmetry is modest: being right on cash conversion is worth about 9% downside versus 15% upside if capex peaks earlier. That is a sell, not a strong sell.
Operating margin versus capex intensity- Operating margin
- Capex / revenue
Capex as share of revenue from SEC facts; Grok FY26-27E
Risks
- Search AI Mode monetizes faster than tests so far, lifting 2027 EPS above $13.
- 2027 capex is cut rather than raised, restoring free cash flow in 2027.
- Restricted SpaceX and private-company marks keep inflating GAAP equity and sentiment.
What would change my mind
A 2026 capex print well below $190 billion with Cloud margins holding above 35% after third-party capacity.