Plans to invest $75bn into artificial intelligence (AI) mean suddenly fewer people seem to want to buy shares in Alphabet (NASDAQ:GOOG). So is this a big problem or an opportunity?
The stock has fallen 7% since the company released its earnings report for the last three months of 2024. But things might not be as bad as they look.
The cloud
One thing analysts are pointing to as a source of disappointment is the sales growth coming from Google Cloud, which came in at 30%. By itself, that doesn’t look too bad.
On closer inspection however, the growth rate is lower than it was in the previous quarter, when sales were up 35% from the previous year. So maybe there’s justification for disappointment.
Despite this, 30% growth is the division’s second best quarterly result in the last 10 quarters. And it’s roughly in line with what Microsoft reported last week from Azure.
Both companies reported being constrained by their data centre capacity. Which brings us to the main event…
AI
Alphabet’s move to ramp up its spending also seems to have come as a surprise. But it’s hard to see why – it’s not as though the company is the only one doing this.
Both Meta ($65bn) and Microsoft ($80bn) have announced plans to increase their AI capital expenditures significantly in the year ahead. So Alphabet is by no means an outlier.
As Warren Buffett says though, the fact that everyone else is doing something isn’t by itself a reason to do it as well. And there are clear risks involved with investing heavily in AI.
In 2024, Alphabet’s operating cash flow was around $125bn. So a move to deploy 60% of this into AI – mostly in infrastructure – is a significant outlay that really needs to work out.
Timing
It’s especially bold given the current view of AI models. Analysts are wondering whether products like Google’s Gemini are ultimately set to become mere commodities with no competitive advantage.
If they are, then a $75bn investment looks like a questionable idea. But CEO Sundar Pichai is sticking to what seems to be the prevailing view among US big tech executives.
The idea is that declining costs should lead to greater usage, resulting in higher demand for computing power. And this means big investments AI infrastructure will ultimately pay off.
Over at Microsoft, Satya Nadella has a similar view. If this is right, then the chance to invest $75bn and earn a decent return on it is a huge opportunity for Alphabet.
A buying opportunity?
Alphabet shares trade at a price-to-earnings (P/E) ratio of 25 – lower than Microsoft (33) or Meta (29). But the company has the AI spending power to match its rivals.
Despite this, the stock comes with risks beyond its spending. The ongoing battle with the Department of Justice is a threat to take seriously – whether investors want to or not.
To my mind, there are currently more obvious opportunities in stocks that have fewer analysts looking at them. So I’ll keep watching Alphabet shares, but I’m not making a move right now.
