Citigroup significantly raised its capital expenditure forecast for Alphabet - C to USD 111 billion, as strong demand for AI may continue to drive up capital expenditures

Citi stated in its latest research report on Tuesday that as the demand for generative artificial intelligence continues to exceed supply, and with the accelerated iteration of Google products, the bank has raised its capital expenditure forecast for Google for 2026 and beyond.

Citi expects Google's capital expenditure in 2026 to reach approximately $111 billion, up from $86 billion in 2025. According to the latest estimates, the compound annual growth rate (CAGR) of capital expenditure from 2024 to 2029 will reach 26%.

Citi believes that this growth is driven by the larger-scale application of Google's AI products and services in core search and cloud businesses. Currently, the token usage of Gemini continues to soar, surpassing 1 trillion times per month, doubling since April this year. The number of Google Cloud (GCP) customers increased by 28% quarter-over-quarter, with backlogged orders accelerating, and Gemini is also driving more of Google's core products.

Citi pointed out that Google's capital expenditure is driving faster product development cycles, which will bring sustained growth to the company. Despite the fierce competition in the search field, Citi believes that Google has stronger execution capabilities, thus maintaining a "Buy" rating with a target price of $280.

Google's parent company Alphabet A shares fell nearly 1% during Tuesday's trading session, closing at $241.94.

Gemini and Accelerating Demand for AI Products

According to the report, the token usage of Gemini had increased to 98 trillion times per month by June 2025, up from 48 trillion times in April. The demand for Google Cloud is also rising, with new customers increasing by 28% quarter-over-quarter, and contracts worth over $250 million doubling year-over-year, while the monthly active users of Gemini reached 450 million, with Citi believing it may have surpassed 500 million in September.

At the same time, the daily request volume for Gemini grew by 50% quarter-over-quarter in the second quarter, with rapid deployment of new features such as AI-Overviews and AI-Mode. Citi noted that about 60% of generative AI startups have chosen Google Cloud, and nine out of the top ten AI laboratories use Google Cloud.

Moreover, this momentum continues into the third quarter. Media reports previously indicated that Google Cloud has signed a six-year AI infrastructure contract with Meta, totaling $10 billion. Google Cloud's backlog increased by 17% quarter-over-quarter to $15.8 billion; in comparison, Amazon AWS increased by $6 billion during the same period.

The report stated that Gemini is gradually being integrated into Google's core products. For example, in the Chrome browser, the AI mode is directly integrated into the address bar; YouTube has launched several new AI features, including rapid integration with Veo 3, voice-to-song conversion, and Ask Studio; Google is also testing a Windows version of the Gemini application, allowing users to access Gemini directly outside of Chrome and search Citigroup believes that the Gemini functionality is rapidly expanding, with usage rising significantly.

Infrastructure Expansion

Google recently launched the Model Content Protocol (MCP) server for data sharing, supporting Agent-to-Agent communication; the company also released an open-source Agent Development Kit (ADK) to facilitate developers in orchestrating between multiple model agents, and introduced the Agent Platform Protocol (AP2), supporting autonomous agent payments for over 60 merchants and financial institutions. Citigroup pointed out that Google is building a broader infrastructure layer for intelligent agents and model ecosystems.

Google announced that it will invest over $50 billion in AI infrastructure over the next few years. This includes: investing $25 billion in the intersection area of Pennsylvania, New Jersey, and Maryland; investing $9 billion to build new data centers in Virginia over two years; investing $9 billion in Oklahoma over two years for infrastructure and skills training; investing $7 billion to expand cloud and AI facilities in Iowa; and investing $3 billion in Pennsylvania to upgrade hydroelectric facilities.

Google also announced global projects in the UK and elsewhere. Citigroup believes this indicates that as OpenAI, Meta, and Amazon significantly expand their data center scales, Google is also continuously increasing its investments.

Capital Expenditures May Remain High for the Long Term

Citigroup expects Google's capital expenditures to reach $111 billion in 2026, a year-on-year increase of 29%, which is $25 billion more than the previous year. The compound annual growth rate from 2024 to 2029 is expected to be 26%. About two-thirds of this will be directed towards servers, and one-third towards data centers and network equipment.

The research report indicates that capital expenditures have already yielded significant results: Google Cloud revenue grew by 32% year-on-year, accelerating from 28% in the first quarter. Meanwhile, AI efficiency is improving. The energy consumption and carbon footprint of Gemini text prompts have decreased by 33 times and 44 times year-on-year, respectively, with a median water consumption of about 0.26 milliliters per request. Citigroup emphasizes that demand still exceeds supply, and Google is seizing the opportunity to invest.

Due to the expectation that AI demand will continue to exceed capacity, Citigroup has raised its forecasts for capital expenditures and depreciation and amortization (D&A) for 2026 and beyond. Capital expenditures for 2026 have been raised by 12% to $111 billion, and for 2027 by 15% to $131 billion. Higher capital expenditures and depreciation and amortization have led Citigroup to lower its 2026 GAAP earnings per share forecast by about 2.5% to $10.56, and for 2027 by about 3% to $11.90.

Citigroup maintains Google's target price at $280, based on a 2026 GAAP earnings per share of $10.56, giving a price-to-earnings ratio of 26.5 times (previously 26 times) The research report indicates that the slightly higher valuation multiples reflect the growth potential of AI demand, but are also partially offset by higher capital expenditures and depreciation. Citigroup believes that Google has 15 products with over 500 million monthly active users and 7 products with over 2 billion users, and its "product halo" will drive continuous growth in search traffic.

At the same time, Citigroup is impressed with Gemini 2.5 Pro and the expanded AI Mode. However, the report also warns that the intensifying competition in search and GenAI products, as well as regulatory risks, remain uncertainties that cannot be ignored