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 capital spending increase to accelerate its AI-investment strategy.
The Google (GOOGL) parent, which still generates the bulk of its revenue from online searches, is looking to infuse AI technologies into that central division and its growing cloud business to widen profit margins and drive efficiencies.
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The cost of that advancement has been significant, however, 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 likely would spend as much as $75 billion more this year, a tally that topped Wall Street forecasts by around $15 billion, 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 revenue, 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 capital-spending surprise isn't likely to sit well.
Pichai 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 revenue
Overall, Google posted a 12% year-on-year revenue gain, with a topline tally of $96.47 billion over the three months ended in December, just shy of Wall Street's $96.56 billion estimate.
Ad revenue rose 10.5% to $72.46 billion. Search revenue, which is included within ad revenue, powered 12.5% higher to just over $54 billion while revenues from YouTube ads fell 4.2% to $7.95 billion.
Cloud revenue climbed 30% to $11.6 billion but slowed notably from the 35% growth rate over the fourth quarter, with finance chief Anat Ashkenazi citing capacity constraints.
Other revenues came from subscriptions ($11.6 billion) and Google's 'other bets' division ($400 million).
"Slower-than-expected growth at the key future revenue driver for the company and much higher [capital expenditure] 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 in affirming his 'outperform' rating and $200 price target on Alphabet.
D.A. Davidson analyst Gil Luria, who kept his $200 price target in place but with a 'neutral' rating, 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 a 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 8% lower in early trading and changing hands at $191.08 each, a move that would wipe out most of the stock's year-to-date gains.
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