The market responded poorly to Alphabet Ltd’s latest earnings.
Despite plans to invest $75 billion in artificial intelligence (AI) infrastructure this year, representing a 29% increase over Wall Street's expectations, investors reacted negatively to a weaker-than-anticipated cloud revenue performance, raising concerns about profitability.
Shares of the Google parent company declined 9% in extended trading, however, it has gained approximately 9% year-to-date.
"It was an uninspiring Q4 result from Alphabet, with its revenue missing estimates and its key growth segment, Google Cloud, not living up to expectations,” eToro market analyst Josh Gilbert said.
“Google’s advertising revenue is its bread and butter through its search business but this is now a mature business with revenue set to grow in the single digits next year.
"For investors, the focus is on cloud, where the company is seeing rapid growth, with operating income up over 250% in 2024.
“The miss on revenue in its cloud business is important because it failed to reassure Wall Street that its heavy investments in AI are translating into better-than-expected growth.
"That concern is more relevant than ever with the emergence of DeepSeek and the fact that Alphabet also said they see capital expenditures at around US$75 billion in 2025, almost US$20 billion more than analysts had expected.
“The market will focus on its miss on cloud revenue and higher capex forecast, but there were bright spots. Google’s search, advertising and YouTube revenues were better than predicted.
“All in all, this was an okay report from Alphabet; it certainly wasn’t magnificent. When you’re spending as much as they are, investors want consistent growth and will become impatient if they don’t get that.
"Alphabet will need to justify its AI spending throughout 2025, and if it can’t, shares will undoubtedly face some pressure."
Increased spending
Market analysts had projected the company's capital expenditures for 2025 to be around $58 billion, based on LSEG data, which would have been a moderate rise from the $52.5 billion spent in 2024.
Chief executive officer Sundar Pichai addressed the substantial increase in spending during a conference call with analysts, amid growing scrutiny over capital investment by Google and its US competitors following the emergence of China's DeepSeek, a cost-efficient AI provider.
Pichai maintained that Google's Gemini AI models were comparable in efficiency to DeepSeek.
"The cost of actually using (AI) is going to keep coming down, which will make more use cases feasible," Pichai said. "The opportunity space is as big as it comes, and that's why you're seeing us invest to meet that moment."
Despite these investments, Alphabet reported slowing growth in its cloud segment. The company has been allocating substantial resources to infrastructure development to support AI-driven innovations across its search and cloud services.
Chief financial officer Anat Ashkenazi stated that the majority of the 2025 capital expenditure would be directed toward servers and data centres, adding that fourth-quarter performance was partly affected by capacity limitations in cloud AI services.
Alphabet intends to allocate between $16 billion and $18 billion in capital expenditure during the first quarter. This significantly surpasses the approximately $6 million that DeepSeek reportedly spent on the final training phase of its AI model.
However, leading AI developers in the US have suggested that the actual training costs for such models are substantially higher. DeepSeek’s reported costs, disclosed in January, sent shockwaves through the market, contributing to a record one-day decline of $593 billion in Nvidia's market valuation.
"It's very hard to defend Google after the earnings report," said Dave Wagner, portfolio manager at Aptus Capital Advisors, which holds Alphabet shares.
He cited the cloud revenue miss and Google's history of capital allocation as key concerns. "DeepSeek has started to teach the market that maybe some things can be done a little bit more efficiently," he said. "Maybe we're starting to see the market dislike the continued increase in capex."
Slowing growth in cloud revenue
According to Brian Mulberry, client portfolio manager at Zacks Investment Management, Alphabet's cloud business had previously grown fast enough to justify its increasing expenditures.
"When you start to see that revenue level off or at least the growth start to top off a little bit, how you're going to finance the future growth of the company becomes an issue," he said.
Google Cloud posted a 30% year-over-year revenue increase to $11.96 billion in the fourth quarter, down from the 35% growth reported in the September quarter. Analysts had projected a 32.3% rise to $12.16 billion, according to LSEG data.
This slowdown occurred despite Alphabet's efforts to integrate AI capabilities into its cloud platform. Pichai noted that developer usage of the company's Gemini AI model had doubled over the past six months, reaching 4.4 million users.
The broader cloud computing market also showed signs of softening, with Microsoft reporting weaker-than-expected growth in its Azure cloud division the previous week. Amazon, the sector's largest player, saw its stock fall 1.8% in after-hours trading ahead of its quarterly earnings release on Thursday.
Advertising revenue remains strong
Alphabet's core advertising business, which accounts for roughly three-quarters of its revenue, continues to face increasing competition from social media platforms such as Meta’s Facebook and Instagram, as well as ByteDance’s TikTok.
The company's advertising revenue increased 10.6% year-over-year to $72.46 billion in the fourth quarter, surpassing the previous quarter’s 10.4% growth and beating analysts' expectations of $71.84 billion. YouTube ad revenue climbed 13.8% to $10.47 billion, up from a 12.2% growth rate in the third quarter.
Chief business officer Philipp Schindler attributed some of this growth to US election advertising, noting that combined spending by Democrats and Republicans had nearly doubled compared with the 2020 election cycle.
Alphabet’s advertising and search businesses remain under regulatory scrutiny in the US, where authorities are seeking to break up parts of the company. However, policy direction could shift under the Trump administration.
Financial performance and future outlook
Alphabet reported total revenue of $96.47 billion for the fourth quarter, reflecting a 12% increase year-over-year, slightly below the LSEG consensus estimate of $96.56 billion. The company posted earnings of $2.15 per share, exceeding analyst expectations of $2.13 per share.
Revenue from search advertising grew 12.5% to $54.03 billion. Pichai stated that AI-generated search summaries, known as AI Overviews, have contributed to increased search usage.
The monetisation rate for ads displayed alongside AI Overviews, introduced in October, is roughly equivalent to that of traditional search ads, according to Schindler.
Meanwhile, Alphabet’s self-driving car unit, Waymo, is preparing to launch internationally, with its first deployment in Tokyo expected in the coming weeks, Pichai said.