When Alphabet (NASDAQ:GOOG) reported its Q4 earnings on Wednesday (4 February) the stock went down, then up, then down again. The results were great, but that’s not the real story.
The company outlined plans to increase its artificial intelligence (AI) spending to huge levels in 2026. But what does that mean for the company and the wider stock market?
Outstanding operations
Advertising revenues were up 14% and Cloud sales increased by 48%. And operating income growth was even more impressive, coming in at 22% and 154%, respectively.
Investors used to wonder whether the shift to AI search might threaten Google’s search position. But the Gemini app reached 750m monthly active users, so that answers the question for now.
Everything seems to be going well, but the real number investors were watching was the planned spending for 2026. And CEO Sundar Pichai guided for somewhere between $175bn and $185bn.
It’s a huge number that means a lot for the company and its shareholders. But it also has implications for the wider stock market.
$175bn
For context, $175bn is well above what Meta Platforms expects ($115bn-$135bn) to spend this year. And it’s more than twice Alphabet’s free cash flows for 2025 ($73bn).
It’s also more cash than the firm has on its balance sheet. So I suspect the company is going to have to finance its spending by taking on debt.
There’s nothing intrinsically wrong with that – it’s probably the right decision if it can get a good return on those investments. But it is risky, especially given the uncertainties around AI profits.
Google Cloud has done well, but there are real questions about where profits are going to come from for the likes of OpenAI and Anthropic. And that makes investing on this scale a big risk.
What it means for the stock market
Alphabet’s big commitment has some serious implications for the wider stock market. It’s a positive sign for the companies that make the equipment that goes into data centres.
Given where those stocks are priced at the moment, a cut in capital expenditures could have seen share prices crash. But demand seems like it’s going to remain strong – at least for another year.
On the other side of the coin, it’s not likely to be good news for software companies that have been under pressure recently. Alphabet’s plan is a clear sign of more AI applications on the way.
A drop-off in data centre spending might have disrupted the competition that’s been threatening some of the biggest names in the industry. But there’s no sign of the pressure letting up yet.
Final Foolish thoughts
My view is that investors could consider buying the stock at today’s prices. If the AI story continues to develop in a positive way, the company should more than justify its current share price.
But I also think that it’s worth looking at some of the beaten-down software stocks to help offset the risk. If – for whatever reason – things don’t go to plan, these businesses stand to benefit.
There’s still a lot of uncertainty around exactly what AI will achieve. But I think investors can look to be smart by playing both sides – and Alphabet is a good stock to consider as part of this strategy.
