Alphabet’s stock dropped by 8% on Wednesday, driven by investor concerns over the company’s slowing cloud growth and planned capital expenditures of $75 billion for the year. This marks a significant shift for the Google parent, highlighting fears surrounding the escalating costs of artificial intelligence (AI) development.
The company’s quarterly cloud revenue grew by 30%, slower than the 35% increase seen in the previous quarter, and missed market expectations. This decline mirrors challenges faced by its larger cloud rival, Microsoft. Analysts have indicated that these results mark a shift in Google’s business model, moving from its capital-light, high-margin search advertising business to a more capital-intensive, AI-driven approach.
The projected increase in capital expenditures (CapEx) for 2025 is 29% higher than analysts’ estimates. Alphabet has indicated that it will prioritize costly AI investments to avoid falling behind competitors, a strategy that has raised concerns among investors looking for a clearer path to AI-driven profits. Analysts such as Gil Luria from D.A. Davidson expressed worry that Alphabet might be heading down the same path as Microsoft, facing the challenges of high AI costs without immediate returns.
Alphabet’s concerns were further compounded by the rise of China’s DeepSeek, a low-cost AI model that has spurred debate about the high expenses of AI development by Big Tech companies. Despite better-than-expected ad revenue performance, the heightened CapEx and cloud struggles have overshadowed the positive results.
Analysts have responded to the concerns by cutting their price targets on Alphabet’s stock, with some expressing doubts about the company’s ability to capture a significant share of the cloud market. Alphabet’s shares remain the cheapest among the major U.S. cloud providers, with a 12-month forward price-to-earnings ratio of 22.7, lower than Amazon’s and Microsoft’s ratios.
