On February 4, Alphabet announced that it would invest $75 billion in its AI expansion this year, a 29% increase over Wall Street's expectations. Despite this, investors reacted with disappointment due to a missed cloud revenue target, which raised concerns about profitability.
Following the news, Google's parent company saw its shares drop by 9% in after-hours trading, even though Alphabet had experienced a 9% increase in its stock value since the beginning of the year.
Previously, Wall Street had anticipated capital expenditures for 2025 to be around $58 billion, a slight uptick from $52.5 billion in 2024. Alphabet's CEO, Sundar Pichai, justified the substantial increase during a conference call with analysts by highlighting the significance of investing in capital spending to leverage opportunities in the expanding AI space.
Despite plans to allocate a significant portion of the budget towards the development of infrastructure for search and cloud services, Alphabet encountered challenges with capacity constraints affecting its cloud AI offerings, impacting its fourth-quarter results.
Furthermore, Alphabet's intention to spend $16-18 billion in the first quarter alone raised eyebrows, particularly as this amount far exceeded what a rival, DeepSeek, had invested in its AI model.
In response to market reactions following the earnings report, analysts and portfolio managers expressed concerns about Alphabet's strategy regarding capital expenses and its ability to drive profitability.
Although Google Cloud experienced rapid growth, concerns lingered about sustained revenue and the potential impact on financing future company growth. Google's cloud revenue growth in the fourth quarter came in slightly below analyst expectations.
Additionally, despite challenges in the cloud segment, Google's ad business remained strong. Advertising revenue surpassed analysts' estimates, supported by growth in YouTube ad revenue. However, Alphabet faces increased competition in the advertising sector from social media platforms like Facebook, Instagram, and TikTok.
Overall, Google's revenue for the fourth quarter increased by 12% to $96.47 billion, slightly below analysts' predictions. The company reported a profit of $2.15 per share, exceeding estimates. Notably, the introduction of AI-generated summaries through AI Overviews saw increased search usage without a significant change in monetization rates compared to traditional search ads.
Looking ahead, Alphabet revealed plans for Waymo, its self-driving car unit, to launch internationally in Tokyo in the upcoming weeks.