- Market is worried that growth is in long-run slowdown
- $180 billion wiped off market cap
- $75 billion AI infrastructure capex spooks investors
After a 7% stock drop overnight for Google parent Alphabet (GOOG:NASDAQ), headlines across the internet are screaming revenue miss, but that doesn’t really capture the detail of the tech giant’s fourth quarter.
Alphabet reported $96.47 billion Q4 revenue, below the market forecast of $96.7 billion, it’s first top line shortfall in eight quarters. That’s a 0.2% miss, although it does tot-up to $230 million. Earnings beat consensus, coming in at $2.15 versus $2.12.
Futures data points to Alphabet stock opening at $193.57, having closed on Tuesday at $207.71, putting the 2025 PE (price to earnings) at 22.
DEVIL IN THE DETAIL
With its core advertising business is doing relatively well (YouTube advertising revenue came in at $10.47 billion, surpassing Street estimates of $10.23 billion), markets are taking a hard look at its Google Cloud business and AI, and have clearly been shocked by CEO Sundar Pichai’s guidance that it will splash up to $75 billion this year on AI infrastructure, a big chunk more than the rough $60 billion the market expected.
Google Cloud’s $11.96 billion revenue was also a little soft, versus the expected $12.19 billion, prompting some analysts to ponder the impact of cloud competition that remains savage, particularly with rivals like Microsoft (MSFT:NASDAQ) and Amazon (AMZN:NASDAQ) throwing capex to expand their own enterprise cloud services.
‘Investors expect flawless execution from the tech giant, yet weaker than expected growth in cloud computing implies the AI craze isn’t automatically turning into big bucks for infrastructure providers’, says AJ Bell investment analyst Dan Coatsworth.
CAPEX IN QUESTION
‘Equally worrying was the $75 billion guidance for capital expenditure. Previously, large capex would have been taken as a positive sign that Alphabet was doing everything it could to capitalise on the hot AI trend. Now the reverse is true. There are fears it might be digging itself a big hole and potentially wasting money if rivals like DeepSeek have shown it is possible to do things a lot cheaper.’
That’s certainly possible although so too is Pichai’s pitch that DeepSeek pushing the AI envelope will only seed more widespread AI demand, which should be good for all providers, so cutting back on capex now might be a terrible idea. For example, Google’s chatbot Gemini, on which some of its vast AI capex to date has gone, remains one of the most advanced available, rated as best in class for productivity, according to PC Magazine, and best for shopping by tech website CNET.
Bear in mind that intense cloud competition, investing for growth, even the potential regulatory noose round Alphabet’s neck is not new and the stock has continued to perform well, up 22% over three months, 30% over six, and 43% over the past year, reflecting broader confidence in the company’s long-term growth potential.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (Martin Gamble) own shares in AJ Bell.
