Big Drop in Alphabet Stock Underscores Investor Unease With AI Spending

Key Takeaways

• Shares of Alphabet slumped on Thursday after the company raised its full-year capex forecast for the second time this year, overshadowing signs that AI investments are helping to boost growth.

• Investors are increasingly concerned that Alphabet and the other hyperscalers are weakening their finances with AI investments that they may never be able to recoup.

Alphabet’s AI spending is translating into growth. Investors still aren’t loving the price tag.

Shares of Google-parent Alphabet (GOOG)(GOOGL) plunged more than 6% on Thursday as investors bristled at the mounting costs and uncertain benefits of its AI data center buildout, even as its infrastructure spending began to bear fruit.

Alphabet on Wednesday raised its full-year capital expenditures guidance range to $195 billion to $205 billion from the $180 billion to $190 billion range it gave just three months ago. CFO Anat Ashkenazi said the increase was “primarily due to an acceleration in the delivery of [cloud computing] capacity to meet growing demand,” and predicted capex would continue to “increase significantly” next year.

Investors are increasingly worried about the bills being racked up by Alphabet and its hyperscaler peers Microsoft (MSFT), Amazon (AMZN), Meta (META) and Oracle (ORCL) as they rapidly increase their spending on AI infrastructure. The group is expected to spend more than $700 billion on capex this year, with the majority of that spending earmarked for AI enabling infrastructure such as chips, servers and networking equipment.

The fear on Wall Street is that the hyperscalers will spend trillions on computing capacity that eventually becomes so abundant they won’t be able to charge enough to recoup their costs.

Why This Is Important To Investors

Investors have contended with uncertainty about returns on AI investments for years, but the debate has become more urgent this year as tech giants increasingly tap debt and equity markets to fund their data center buildouts.

More Tech Earnings Coming Next Week

Alphabet’s upped investment forecast was weighing on its peers’ stocks as well Thursday, suggesting capex forecasts could be the Achilles heel of tech stocks as more earnings reports land in the coming weeks.

Amazon and Oracle were both down more than 4% in recent trading, while Meta slid 3% and Microsoft declined more than 2%. On the other hand, a few high-profile beneficiaries of AI spending rose, including Sandisk (SNDK) and Micron (MU), each up more than 2%. 

Alphabet’s spending has grown so quickly and become so large that its free cash flow turned negative for the first time in its history last quarter. The company burned through nearly $6 billion as it shelled out $45 billion for property and equipment, a 25% increase from the first quarter.

As their free cash flows dwindle, the hyperscalers are selling stock and debt to finance their data center builds, weakening their balance sheets and diluting shareholders in the process. Alphabet last month announced it was issuing up to $85 billion of new stock “to scale AI infrastructure and global compute.” Its long-term debt more than doubled to $98 billion in the first half of the year.

Spending Concerns Outweigh Strong Results

Wall Street’s concerns about runaway AI spending overshadowed the positive surprises in Wednesday’s report. Notably, Google Cloud revenue—a proxy for AI demand and the primary target of Alphabet’s capex—grew 82% to nearly $25 billion, blowing past Wall Street’s estimates. Its backlog increased by $50 billion to total more than $500 billion. The company said cloud demand is so strong it intends to rent data center capacity from third parties in order to keep adding new customers. 

Many analysts believe Alphabet is giving investors what they’ve been demanding for years: evidence of AI’s return on investment. “We continue to believe Google is showing returns on AI spending,” wrote JPMorgan analysts on Thursday. Google’s AI mode “continues to support greater search engagement,” while AI-driven improvements are increasing the relevance and value of ads across its platforms, according to JPMorgan. Bank of America analysts argued accelerating cloud growth,  expanding cloud margins, and its fast-growing backlog were all clear evidence that investments are already paying off. 

Experts were surprised by the stock market’s reaction on Thursday. “We acknowledge it wasn’t a perfectly clean quarter, but bottom line is that the positive surprise from Cloud revs/EBIT more than offsets modest negatives,” including slightly soft core search revenue and the expected margin pressure from third-party cloud agreements, wrote Mizuho analysts on Thursday. “We would be buyers of Google shares on the pullback,” said JPMorgan.

Others saw an informative signal in the market’s response. “We’re very much in a narrative driven tape,” wrote Bernstein analyst Mark Schmulik on Thursday. With investors questioning the strength of its finances and the performance of its frontier AI models, Alphabet “is a tough stock to own,” he said.

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