---
title: "The Google Capital Company"
source_url: https://stratechery.com/2026/the-google-capital-company/
ingested: 2026-06-03
sha256: pending
tags: [newsletter, ai]
---

# The Google Capital Company

URL: https://stratechery.com/2026/the-google-capital-company/


Published Time: 2026-06-02T10:00:00+00:00

Markdown Content:
**Listen to this **post**:**

What does the most beautiful business model of all time look like?

First, imagine that your supply is free. Second, imagine that your customers willfully compete against each other to raise your prices. Third, imagine that your users decide which of your customers gets the privilege of paying you. All you have to do is build a bit of infrastructure to make it all happen, pay a nominal bit of depreciation on that infrastructure, and make billions of dollars on some of the greatest margins in the history of business.

I am, of course, describing Google, a company so good that Warren Buffett, the legendary investor, could never quite bring himself to invest in it. Buffett explained in the [2017 Berkshire Hathaway annual meeting](https://forum.valuepickr.com/uploads/default/original/2X/7/7e8e091d9fdbc77fd45d49479502f73a832bde4d.pdf):

> We were their customer very early on with GEICO, for example, and we saw — these figures are way out of date — but as I remember, we were paying them $10 or $11 a click, or something like that. And any time you’re paying somebody $10 or $11 bucks every time somebody just punches a little thing where you got no cost at all, you know, that’s a good business unless somebody’s going to take it away from you. And so we were close up seeing the impact of that…But, you know, you’ve almost never seen a business like it.

One of the characteristics of an Aggregator like Google is the way in which they maximize absolute value at the expense of relative value. For supply — i.e. content on the web — Google dramatically increases the number of visitors, even as the value of any one visitor who comes from Google is worth much less than a visitor who visits directly; for an advertiser, the value of one click makes up for thousands of impressions of an ad that make no difference; for a user, Google helps them discover what they are looking for amidst the overwhelming abundance that is downstream from distribution being free. In every case the Aggregator increases quantity at the expense of relative quality, confident that the absolute amount of quality will be more in the long run.

What is interesting is that this is the exact inverse in terms of why these companies have been valued by investors. The best tech companies are “asset-light”, predicated on maximizing zero marginal costs. Yes, they spend a lot of money on R&D and on the infrastructure to make markets happen, but they don’t actually participate in those markets; simply taking a skim and keeping the vast majority of that skim is what gets Wall Street excited. In other words, it was the relative amount of money made that was generally more important to the market than the absolute amount of money.

### Berkshire Hathaway and Productive Capital

Berkshire Hathaway was, before Buffett acquired it, a failing textile business; Buffett originally invested because the stock was worth less than the liquidation value, and ended up owning it outright after a dispute with management. It was a decision he regretted; from the company’s [1989 letter to shareholders](https://www.berkshirehathaway.com/letters/1989.html):

> If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible…Time is the friend of the wonderful business, the enemy of the mediocre…
> 
> 
> I could give you other personal examples of “bargain-purchase” folly but I’m sure you get the picture: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.

One of the first-class businesses Berkshire Hathaway acquired was See’s Candies in 1972. Buffett explained in the [2007 shareholder letter](https://www.berkshirehathaway.com/letters/2007ltr.pdf):

> We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital…
> 
> 
> Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip).

The “problem” with a See’s Candies is that there is nothing to be done with all of that profit; if it’s privately held then its owners end up with more cash than they know what to do with, and if it’s public, then the job is to figure out how to return that cash to shareholders through some combination of dividends and stock buybacks. What Berkshire Hathaway did, however, was use that cash to grow:

> After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

One of the businesses Berkshire Hathaway used the See’s profits for was on the opposite end of the spectrum in terms of capital utilization: BNSF Railway. Railways require a lot of capital to operate; BNSF consumed $3.8 billion last year; they also make a lot of money: BNSF’s net income was $5.5 billion on revenue of $23.4 billion. To put that in perspective, the total amount that Berkshire Hathaway has made from See’s Candies is probably less than $3 billion (the last disclosure was “over $2 billion” in 2019), i.e. less than BNSF made last year.

So which is the better business?

### Google Cloud’s Runway

In Q4 2019, the first year that Alphabet disclosed Google Cloud revenue, Google Services — the high margin beautiful business I described at the beginning — made $43.2 billion in revenue and $13.5 billion in operating profit; Google Cloud made $2.6 billion in revenue and lost $1.2 billion. Google Cloud revenue was 6% the size of Google Services.

In Q1 2023, Google Cloud made a profit for the first time. In that quarter Google Services made $62.0 billion in revenue and $21.7 billion in profit; Google Cloud made $7.5 billion in revenue and $0.2 billion in profit. Google Cloud revenue was 12% the size of Google Services, and its profit was 1% the size of Google Services.

In Q1 2026, Google Services made $89.6 billion in revenue and $40.6 billion in profit; Google Cloud made $20.0 billion in revenue and $6.6 billion in profit. Google Cloud revenue was 22% the size of Google Services, and its profit was 16% the size of Google Services.

Google Services is, needless to say, a much more scalable business than See’s Candies. The growth just over the last seven years — more than doubling revenue and tripling profits — is astounding. And yet, at the same time, Google Cloud is growing faster, and while its margins are worse — 33% last quarter as compared to 45% for Google Services — they are expanding more rapidly.

The bigger question is how big can those numbers go? Google Services’ advertising business is inherently high margin, but advertising is definitionally but a fraction of the overall economy; Google Cloud’s growth, meanwhile, is AI, which many people think/worry/hope might take over the entire economy. In other words, might we one day look back and realize that Google Services provided the cash flow to build a business with relatively worse margins but absolutely higher dollars, much like See’s helped fund BNSF?

### Berkshire Hathaway and Google Equity

The context for this discussion is this news from [Bloomberg](https://www.bloomberg.com/news/articles/2026-06-01/alphabet-to-raise-80-billion-in-equity-capital-for-ai-spending):

> Google parent Alphabet Inc. is raising $80 billion through a package of equity offerings, including an investment deal with Berkshire Hathaway Inc., as the company races to fund its ambitious artificial intelligence spending plans. The undertaking includes a $40 billion so-called at-the-market program to sell shares from time to time beginning in the third quarter, according to a statement Monday. The company will also offer $30 billion in underwritten offerings of shares and mandatory convertible preferred stock, as well as the $10 billion deal with Berkshire. Together, the transactions represent one of the largest equity deals of all time — and they bring an unexpected twist to a blockbuster year for initial public offerings.

First off, a decent portion of the ATM program, launching in the fall, is going towards paying tax obligations on Google equity awards (which are quite large thanks to the stock’s run-up in value).

That leaves equity being issued now, particularly the $10 billion to Berkshire Hathaway, which is fascinating for a number of reasons. The first question is why did Google issue equity instead of debt? Debt is, all things being equal, the preferred instrument for investment: the proceeds of the latter pay off the former, and existing equity holders reap all of the benefits. Equity, on the other hand, removes the risk of debt, but at the cost of giving up a share of future profits.

Google has to date funded its massive AI-related capital expenditures with free cash flow, and while the company does have around $81 billion in debt, that is more than balanced by $126 billion of cash. In other words, Goog