Alphabet shares bumped higher in early Tuesday trading as investors looked to the tech giant's second quarter earnings, slated for after the closing bell, to provide a key update on the billions it's spending to develop its AI-powered technologies.
Alphabet, the parent of tech and ad giant Google, could see its capital spending rise to as high as $45 billion this year as it rolls out AI-themed products to support its core search business and expands its broader data center footprint to enhance sales from its Cloud division.
That spending, however, raises concern that profit margins could narrow, potentially leaving investors to look elsewhere for mega-cap tech stock growth following a one-year gain of more than 50% for the Magnificent 7 stalwart.
Google's capital spending hit $12 billion over the first three months of the year, a tally finance chief Ruth Porat said was "driven overwhelmingly by investment in our technical infrastructure " but also reflecting "our confidence in the opportunities offered by AI across our business."
"Looking ahead, we expect quarterly capex throughout the year to be roughly at or above the Q1 level," she told investors in April.
Alphabet's capital spending plans in focus
Alphabet unveiled plans for its first-ever dividend and a $70 billion stock buyback following stronger-than-expected first-quarter earnings in April.
These moves were seen at the time as an attempt to soften the blow of accelerated AI and capital spending plans.
"While a negative surprise related to spending remains a risk for Alphabet (and all of megacap internet), we think the chances are relatively low this quarter, as the increased capital intensity is better understood and estimates for (depreciation) and CapEx have risen materially following guidance last quarter," said Wedbush analyst Dan Ives.
Related: Analysts revamp Google parent stock price target into Q2 earnings
One of the more immediate benefits of the AI spending spree is likely evident in Google's core search business, which could generate as much as $47 billion in revenues over the second quarter.
Alphabet rolled out its "AI Overviews" tool earlier this spring. This add-on to its search function uses artificial intelligence and a customized language model to summarize results.
"While still a nascent product, our sense is AI Overviews is encouraging more searches," said KeyBanc Capital Markets analyst Justin Patterson, who carries an 'overweight' rating with a $200 price target on Alphabet stock.
"Over time, we believe this could lead to more targeted ads, which could support Search growth," he added.
Google Cloud sees AI boost
Cloud revenues are also set to benefit from the AI investment surge, with Google's Cloud division likely to report a 26.5% growth rate and a top line of around $10.16 billion, according to Wall Street forecasts.
"We think the business is well positioned in 2Q and 2H as the bulk of cost optimization pressure appears to be behind the industry and AI monetization continues to drive incremental dollar growth," said Ives at Wedbush, who carries an 'outperform' rating with a $205 price target on Alphabet.
Related: Analysts reboot Google parent stock price target ahead of earnings
Google's AI push also adds heft to YouTube, which Patterson at KeyBanc sees generating revenues of around $9.14 billion.
"We see YouTube sustaining high-teens revenue growth due to a brand advertising recovery and political ad spending cycle," Patterson said.
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A further pullback in ad spending on TikTok is providing a further boost after President Joe Biden signed legislation that gives China-based ByteDance, TikTok's parent, until January to divest its U.S. assets or face a complete ban in the world's largest economy.
At the parent level, Alphabet is expected to post second-quarter earnings of $1.84 per share, a 27.7% improvement from the same period last year. Revenues are expected to rise 12.9% to $84.21 billion.
Alphabet shares were last marked 0.36% higher in early Tuesday trading and changing hands at $184.12 each, a move that extends the stock's six-month gain to around 24%.
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