Alphabet Inc. (NASDAQ: GOOG) reported fourth-quarter earnings that fell short of market expectations, primarily due to weaker-than-anticipated cloud revenue.
Despite strong growth in advertising, shares dropped 7.9% in extended trading as investors reacted to the disappointing cloud segment and a sharp increase in capital expenditure (capex) guidance. While the company continues to benefit from its dominance in digital advertising, concerns about the trajectory of its cloud business and higher spending on AI-related infrastructure weighed on investor sentiment.
Total revenue for the quarter reached $96.47 billion, reflecting a 12% year-over-year increase but slightly missing the $96.62 billion consensus estimate. Revenue excluding traffic acquisition costs (ex-TAC) came in at $81.62 billion, below the expected $82.82 billion. Earnings per share (EPS) stood at $2.15, narrowly surpassing the $2.13 forecast, while operating income surged 31% year-over-year to $30.97 billion, exceeding estimates of $30.72 billion. The company’s operating margin remained strong at 32%, aligning with market expectations. These figures highlight Alphabet’s ability to drive profitability despite competitive pressures and regulatory scrutiny, particularly in its core search business.
Google’s advertising business continued to perform well, generating $72.46 billion in revenue and exceeding the $71.73 billion estimate. Search advertising, Alphabet’s largest revenue contributor, brought in $54.03 billion, slightly above forecasts. YouTube ad revenue also came in ahead of expectations at $10.47 billion, reflecting increased engagement and advertiser interest in video content. However, Google Network revenue fell short at $7.95 billion, missing the projected $8.14 billion. While these figures underscore the resilience of Alphabet’s digital advertising model, ongoing regulatory challenges—including antitrust concerns—pose potential risks to future growth in this segment.
Despite strength in advertising, the cloud business remained a point of weakness. Google Cloud revenue grew to $11.96 billion but fell short of the $12.19 billion consensus estimate. While the segment reported operating income of $2.09 billion, slightly above estimates, the lower-than-expected growth rate raised concerns about its ability to compete with Amazon Web Services and Microsoft Azure. The cloud industry has been a key battleground for AI-driven computing services, and investors had expected stronger performance given Google’s increasing reliance on its custom TPU chips. Slowing growth in this area could hinder Alphabet’s ability to capitalise on the rapid expansion of AI workloads.
A major concern emerging from the report was Alphabet’s significant increase in capital expenditure plans. The company projected $75 billion in capex for 2025, far above the $57.9 billion expected by analysts. This aggressive investment is focused on expanding AI infrastructure, including data centres and computing power to support AI model development. While Alphabet sees AI as a critical driver of future revenue growth, investors are questioning whether such heavy spending will yield a strong return on investment. The announcement also impacted the broader tech sector, with Broadcom shares rising more than 6% as investors anticipated increased demand for AI-related semiconductor components.
Looking ahead, Alphabet remains well-positioned with AI-powered enhancements to Search, YouTube, and Google Cloud. The integration of AI into Google Search—through features such as AI Overviews and Circle to Search—has helped maintain its dominance despite increasing competition from AI-native search platforms. YouTube has also benefited from AI-driven
content recommendations, which continue to boost user engagement. The company’s investment in AI models, including Gemini and Vertex AI, is expected to strengthen its competitive position in the generative AI space. However, maintaining investor confidence will require clear evidence that these AI-driven initiatives can translate into sustained revenue growth.
With a solid foundation in advertising but uncertainty surrounding its cloud business and capital allocation strategy, Alphabet faces a challenging balance between long-term AI investment and near-term profitability. While its core business remains strong, the company will need to demonstrate that its AI ambitions can drive meaningful returns to justify its higher spending levels. Investors will be closely watching Alphabet’s future earnings reports for signs of improvement in its cloud segment and greater visibility on the financial impact of its AI-driven investments.
