Alphabet shares slumped in early Wednesday trading after the tech giant posted a muted set of fourth-quarter earnings and unveiled plans for a big increase in capital spending to accelerate its AI investment strategy.
The Google (GOOGL) parent company, which still generates the bulk of its sales from online searches, is looking to infuse AI technologies into that central division and its growing Cloud business to improve profit margins and drive efficiencies.
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The cost of that advancement, however, has been significant, with Google spending more than $52 billion last year on new data centers and servers and purchasing AI-powering chips from market leader Nvidia (NVDA) .
The tech giant also told investors it will likely spend as much as $75 billion more this year, a tally that topped Wall Street forecasts by around $15 billion. This comes amid what CEO Sundar Pichai called “one of the biggest years for Search innovation yet.”
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However, with Google posting a quarter-on-quarter decline in cloud revenues, which came in just below Wall Street forecasts at $11.96 billion, and investors looking at the rapid advances (at minimal costs) from China-based AI startup DeepSeek, a big capex surprise isn’t likely to sit well.
Google CEO Sundar Pichai said the current AI opportunity is “as big as it comes”.
Pichai, though, defended the increase during the group’s investor call late Tuesday.
“The cost of actually using (AI) is going to keep coming down, which will make more use cases feasible, and that’s the opportunity space,” Pichai said. “It’s as big as it comes, and that’s why you’re seeing us invest to meet that moment.”
Google sees slowing Cloud revenues
Overall, Google posted a 12% year-on-year revenue gain, with a topline tally of $96.47 billion over the three months ending in December, just shy of the Street’s $96.56 billion estimate.
Ad revenues rose 10.5% to $72.46 billion, while search revenues powered 12.5% higher to just over $54 billion.
Cloud revenues were up 30% to $11.6 billion but slowed notably from the 35% growth rate over the three months ending in December, with finance chief Anat Ashkenazi citing capacity constraints.
“Slower than expected growth at the key future revenue driver for the company and much higher capex to drive that growth is a tough combo, which is why the stock is, reasonably, selling off,” said Pivotal Research analyst Jeffrey Wlodarczak.
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“Our view is Google remains attractively valued, with frankly great assets, but investors will need to be patient as management needs to continue to deliver in search and YouTube and prove out that the decelerating cloud growth was one off,” added Wlodarczak, who reiterated his ‘buy’ rating and $225 price target on the stock in a note published Wednesday.
Wedbush analyst Dan Ives, meanwhile, noted that Google’s elevated capex plans should “alleviate capacity constraints as AI demand continues to scale” and noted that management commentary on that side of the equation was positive.
AI investments are set to pay off
“Google has made meaningful progress across its AI investments in its core enterprise and consumer products,” he added, citing AI Overviews, AgentSpace and the testing of its Gemini 2.0 chatbot.
“We continue to see a favorable risk/reward for Alphabet and think there is a case for multiple expansion in the coming quarters as investors gain more comfort related to infrastructure spending, regulatory risk, and the impact of generative AI on Google Search,” Ives concluded as he held his ‘outperform rating and $200 price target in check.
D.A. Davidson analyst Gil Luria, who also held his $200 price target and ‘neutral’ rating in place, said that “despite the disappointing results, management noted significant progress throughout Google Cloud and their AI-related products and services.”
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“And despite Google Cloud’s AI products helping drive growth on the platform, it was highlighted that capacity constraints of compute limited upside this past quarter, with management expecting these to ease throughout the next fiscal year,” he added.
Google earnings lack ‘excitement’
Cantor Fitzgerald analyst Deepak Mathivanan was slightly more cautious. Following last night’s update, he lowered his price target on the stock by $10 to $200 per share.
“Overall, there were few surprises on Google’s 4Q results other than the capex guide [but] that said, there was little to get incrementally excited about for 2025,” he said.
“Google continues to make strong advancements in several cutting-edge technologies, including AI, but risks to core Search business from competition/antitrust remain elevated,” he added.
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“We are pushing the next frontiers from AI agents, reasoning and deep research to state-of-the-art video, quantum computing and more,” Pichai told investors last night. “The company is in a great rhythm and cadence, building, testing and launching products faster than ever before. This is translating into product usage, revenue growth, and results.”
Alphabet shares were marked 6.7% lower in early trading trading and changing hands at $193.82 each, a move that would wipe out most of the stock’s year-to-date gains.
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