011Can ads alone pay for the AI capex?

What changed

Meta. Revenue grew 17.5% a year from 2019 to 2023 and averaged about 7% in 2022–23. It grew 22% in 2025 and 26% in the third quarter of 2026, on more than three times its 2019 revenue. In constant currency, growth peaked at 29% in the first quarter.

Alphabet. Outside Cloud it grows about 15%, its 2019–23 pace and twice its 2022–23 rate. Search accelerated from 10% in early 2025 to 19% in the first quarter of 2026 and 17% in the second; about 3 points of the first quarter’s company-wide growth was currency, against 1 in the second. YouTube ads grow about 13%, well below their 2019–23 pace. Cloud is the outlier: 28% growth in early 2025, 82% now, with a $514B backlog.

Is growth accelerating?

Meta: no, it has leveled off high. Constant-currency growth rose from 19% in early 2025 to 29% in the first quarter of 2026 and has eased by about a point a quarter since; the fourth-quarter guidance midpoint is about 25%. Against two years earlier Meta is steady at 24–26% a year, so most of the slowdown is tougher comparisons.

Alphabet: only Cloud. Its ad businesses accelerated through 2025 and have leveled off at about 15% outside Cloud. Cloud has accelerated every quarter, from 28% to 82%. The Street expects Alphabet’s total growth to ease to about 22% in the third quarter, on consensus revenue of $124.6B.

Impressions grew 19% in the first quarter of 2026 and 10% in the third, as daily users grew 3%. The average price per ad went the other way, from 6% in the fourth quarter of 2025 to 14%, with no currency effect in the third quarter. Higher prices on slowing volume are consistent with better targeting and conversion, though tighter ad supply would push prices up too. Meta credits ad performance, along with macro conditions and currency, and said on its second-quarter call that ranking advances lifted Facebook ad clicks 8.3% and conversions 15.7%. Volume is the risk: WPP Media expects social ad growth to slow from 2027 as engagement plateaus and chatbots compete for time.

How we split AI from trend

No business has a clean control group, so the trend is a judgment. Meta, 11% a year: user growth of 3–5%, more ad load and new surfaces such as WhatsApp and Threads, and ad prices rising with the market. WPP Media puts global ad growth at 8.9% this year excluding US political advertising, and the US at 11.9%. Meta’s own 2019–23 pace, 17.5%, includes a pandemic boom on half today’s base. Google’s ads, 7.5%: their 2022–23 pace was 6.6%, Search’s 8.4%. Without AI, Search would arguably have lost queries to chatbots, so this may understate what AI is worth to Google. Cloud, 22%: it grew 26% in 2023 and was slowing with scale. The rest of each gap we leave to macro, currency and products that aren’t AI.

At these settings AI adds about 9 and 10 points to Meta’s growth in 2024 and 2025 and 15 in 2026, 22% of this year’s ad revenue; about 3–5 points a year to Google’s ads, 9% of this year’s; and 37% of Cloud’s revenue. For 2027 we assume Meta’s ads grow 18%, Google’s 11% and Cloud 55%. AI’s points are the growth in AI’s revenue over last year’s revenue, so they and the rest add up to the year’s growth.

How the return is counted

Returns. AI’s share of above-trend ad revenue at a 75% cash margin, after the cost of serving ads and before depreciation, taxed at 15%. Capex earns from the year after it’s spent, so 2027’s ad gains count against capex through 2026. After 2027 the gain is held as a share of the business, since a better ad system multiplies whatever advertisers spend, and fades 1.5% a year: no further share gains from AI.

Costs. All capex above 17% of no-AI ad revenue: $187B over 2022–26, and $201B more if 2027 comes in at $235B. Meta hasn’t guided 2027; in July the buy-side expected $225–250B. The 17% baseline is close to Meta’s 2021 capex (16% of revenue) and below its 2019–23 average (about 21%), so it charges more to AI than a higher baseline would; at 21% the return through 2026 would be 46%. We put servers at 60% of capex, Alphabet’s split. They are replaced every six years at 75% of their cost for half the fleet, the part the ad gains need; the rest belongs to the moonshots and earns nothing. Servers are expensed at once for tax, data centers over 20 years. Nothing is counted after 2040.

Results. Through 2026: 35%, paid back in 2029. At a 10% hurdle the ad gains could carry 2.5× that capex. With 2027 at $235B and nothing extra to show: 18%, paid back in 2032; each further $10B in 2027 takes about 0.6 points off. With another $250B in 2028: 8%, paid back in 2036. All-in: 27%, 12% and 3%. In our base case another year of moonshot spending, 2028, is what takes the return below 10%; all-in, 2027 alone brings it close. At the low end of our ranges 2027 can do it on its own, as the grid above and the simulation below show.

Alphabet’s two legs

Ads. Charged half the capex, Google’s AI ad gains return 33% on spend through 2026 and 11% through 2027. That rests on something nobody can observe: at a 9.5% no-AI trend the 2027 case returns −1%, at 5.5% 21%. At a 10% hurdle the ad gains alone could carry 105% of all Alphabet’s incremental capex through 2026, but only 53% through 2027.

Cloud. Revenue grew 82% to $24.8B in the second quarter, with an operating margin of 35.6%. We use a 50% cash margin on its AI revenue, before depreciation; Cloud’s figures include Gemini’s API, compute rented to AI labs and TPU sales. Charged the other half of the capex, Cloud returns 11% through 2026, when its revenue stops at the end-2026 run-rate, and 15% through 2027, as the 2027 build converts backlog: compute-rental economics, steady but not spectacular. Alphabet says renting third-party capacity as a bridge while it builds its own will weigh on Cloud’s margins.

Together 23% through 2026 and 13% through 2027, paid back in 2034. The 2027 build pays well only if Cloud keeps compounding beyond its backlog or the models earn money of their own.

When does the cash come back?

Spend through 2026 clears a 10% return in all of our 8,000 draws for Meta and 93% for Alphabet. Add 2027 with nothing extra from the moonshots and it clears in 93% of draws for Meta, 61% all-in, and 66% for Alphabet. The medians, 34%, 17% and 11% for Meta and 22% and 13% for Alphabet, sit within a point of the base case.

A vintage that earns its cost of capital still doesn’t reach shareholders while the race is on. Meta bought back $26.2B of stock in the first nine months of 2025 and none so far in 2026; its free cash flow was −$2.1B in the third quarter, and it is creating a non-voting Class C share, partly to raise capital. Alphabet bought back no stock in the first half of 2026 and raised about $106B: $56B of debt, $30B of common stock and $19B of preferred. Cash comes back when capex plateaus, and that runs against success: Zuckerberg’s stated fallback if superintelligence takes longer is to put the compute into the core business and, at worst, slow new building for a while. In our judgment, buybacks back at 2025’s pace by the end of 2028 are about a 30% chance at each company, likelier if the moonshots disappoint than if they work.

What to watch

Alphabet’s third quarter, October 28. Search against 17% and Cloud against 82%. A Cloud slowdown with capex still rising is the case where the 2027 build doesn’t pay.

Meta’s 2027 capex. Meta hasn’t guided yet. Each $10B above $235B with nothing extra to show costs about 0.6 points of return on the program.

Price against volume at Meta. Price per ad growing faster than impressions is the ranking gains showing up. Both slowing together would mean the gains are fading.

Legal costs. Meta’s settlement with 52 state attorneys general provides for payments of up to about $18.6B, and more youth-related trials are scheduled. None of this is in the model.