Alphabet Inc.’s impressive second-quarter earnings release on Wednesday seemed on course to go down mostly well with investors. Until the earnings call, the Google parent’s share price was up marginally in after-hours trading, buoyed by cloud growth that smashed estimates.
Then executives disclosed their projection that capital expenditures would increase again, sending the stock down by as much as 4.6%. Let it be a warning to the other hyperscalers preparing to report next week: Even with a quarter as good as this one, you’ll still be punished if you announce yet more spending in pursuit of artificial intelligence.
By reporting first this season, Alphabet is a useful bellwether — no single company provides investors exposure to so many parts of the so-called AI stack. The company develops its own frontier models, offers cloud hosting and hardware for the AI needs of others and has a role in the application layer, too — it has spent much of the year aggressively pushing its AI into consumer products that each boast more than a billion users, such as Google Maps. The Gemini app, the company disclosed, is now just 50 million short of a billion active monthly users.
Inside the sprawling portfolio, it was Google Cloud revenue that investors were watching most closely, both for what it said about the success of Google’s investments in infrastructure and custom AI chips but also what it might foreshadow for cloud businesses at Microsoft Corp. and Amazon.com Inc.
Plainly, Alphabet smashed it out of the park — revenue growth of 82% was a massive beat on the 72% Wall Street had been expecting. Google’s cloud backlog — a measure of future revenue for cloud capacity not yet available — has grown 12% year-over-year.
Those numbers were so strong they were seemingly enough for investors to overlook an ever-so-slight miss in Alphabet’s “Google Search & Other” segment — which came in $13 million shy of the Bloomberg consensus estimate of $63.28 billion. The last time that happened, in the final quarter of 2023, the margin was similarly small: just $36 million off estimates. But that miss was credited for a 6.5% slide in the stock price, so deep was the concern that the shift to AI would cut into Google’s legacy business.
The latest results prove that, since then, Google has been able to change the narrative around its search business, convincing investors it has a game plan with its AI Overviews and AI Mode that is providing new advertising opportunities and reducing the migration of would-be Google searchers to an AI chatbot instead. “Across AI Overviews and AI Mode, people are asking more specific and detailed questions, providing opportunities for more relevant ads within AI Mode,” said Philipp Schindler, chief business officer.
But the narrative that cannot be shaken is that this is all costing too much money. Between investing in its own needs for AI computing power and building up the data centers for other companies, Alphabet is now projecting its capital expenditures to land between $195 billion to $205 billion for this year, up from a projection of $180 billion to $190 billion.
So if by going first Alphabet has set the tone for this tech earnings season, the other hyperscalers on deck should stand ready for a hostile reception, even if they can post similarly strong results. And if your business isn’t performing as well as Alphabet’s? That could be very bad news indeed.
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