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Alphabet’s Cloud Stumbles and AI Ambitions Shake Investor Confidence
Jacob Falkencrone
Global Head of Investment Strategy
Key points:
- Alphabet’s earnings beat on profits but missed on revenue due to slowing cloud growth, sending the stock down 8% in after-hours trading.
- AI investments are surging, with a USD 75 billion CapEx plan for 2025, raising concerns about profitability and execution.
- Google Cloud’s revenue growth slowed, trailing Microsoft and Amazon, while competition from AI startups like DeepSeek adds further pressure.
Alphabet’s Q4 2024 earnings report was a mixed bag—strong ad revenues, a slight earnings beat, and a massive AI-driven spending spree that left investors uneasy.
Alphabet, the parent company of Google, posted fourth-quarter earnings that highlighted both its strengths and challenges. While advertising revenue remained robust and the company continues its aggressive push into artificial intelligence, concerns over slowing cloud growth and a USD 75 billion capital expenditure plan sent the stock tumbling in after-hours trading.
The Numbers: A Revenue Miss, but Solid Profits
Alphabet reported USD 96.47 billion in revenue (Ex-TAC USD 81.6 bn), up 12% year-over-year, but just shy of Wall Street’s expectation. The key results are:- Earnings per share (EPS): USD 2.15 vs. USD 2.13 expected.
- Google Search ad revenue: USD 54 billion, exceeding estimates.
- YouTube ad revenue: USD 10.47 billion, topping expectations.
- Google Cloud revenue: USD 11.96 billion, missing the expected USD 12.19 billion.
Despite the revenue miss, net income surged 28% highlighting Alphabet’s profitability.
Why the Stock Fell: Cloud Growth Disappoints & AI Spending Surges
Alphabet’s cloud division, a key growth area, saw revenue rise 30% to USD 11.96 billion – which is strong, but slower than the 35% growth in the previous quarter and short of analysts’ forecasts. CFO Anat Ashkenazi pointed to capacity constraints, meaning demand outpaced Alphabet’s ability to scale.
What might also have rattled investors is Alphabet’s massive USD 75 billion capital expenditure (CapEx) plan for 2025, primarily for data centers and AI infrastructure. This represents a 42% increase from 2024 and far exceeds Wall Street’s estimates. CEO Sundar Pichai defended the spending, emphasizing that AI efficiency is improving and the investments are essential to stay ahead.
However, this didn’t reassure markets. Alphabet shares fell 9% in after-hours trading, erasing nearly USD 200 billion in market value, marking one of its worst trading days in a decade.
The AI Battle: Alphabet vs. DeepSeek and Microsoft
Alphabet is doubling down on AI, but the competitive landscape is heating up.
- Chinese AI startup DeepSeek has developed a powerful model at a fraction of the cost of U.S. rivals, raising concerns that Alphabet’s AI lead may “meaningfully erode”.
- Microsoft and Amazon continue to dominate cloud computing, forcing Google to play catch-up.
- There’s also the looming question of whether AI chatbots like Gemini could cannibalize Google Search, its biggest cash cow.
Pichai acknowledged DeepSeek’s efficiency, calling them a “tremendous team,” but insisted that Google’s AI models remain highly competitive.
Opportunities & Risks for Investors
Opportunities:
- AI Integration & Monetization – AI-powered Search, YouTube, and Cloud services could drive future revenue growth.
- Cloud Expansion – Despite short-term setbacks, cloud remains a high-margin growth area.
- YouTube Growth – Continued strength in streaming, especially as YouTube expands into podcasts and other formats.
Risks:
- Regulatory Pressure – Alphabet faces antitrust challenges in the U.S., Europe, and China, which could force structural changes.
- Profitability Concerns – The huge CapEx spend could hurt margins if it doesn’t generate enough return on investment.
- Competitive Threats – Rivals like Microsoft, Amazon, and new AI entrants could erode Alphabet’s market position.
Investor Takeaways: What to Watch Next
- Cloud Revenue Growth – If Alphabet can resolve capacity issues and accelerate cloud growth, confidence could return.
- AI Monetization Strategy – How well Alphabet turns AI innovations into profitable services will be crucial.
- Stock Buybacks or Cost Controls? – Investors will look for signs Alphabet is balancing growth spending with shareholder returns.
Alphabet’s advertising empire remains rock-solid, and its push into AI is ambitious. However, slowing cloud growth and aggressive AI spending have raised legitimate investor concerns, and for now, the company needs to prove that its massive investments will pay off.