Alphabet's AI Spending Under Scrutiny as Google Cloud Growth Cools

Alphabet, the parent company of Google, is expected to face intense investor scrutiny over its massive artificial intelligence spending when it releases the latest earnings on Tuesday, Reuters reports. The slowdown in revenue growth within Google's advertising and cloud businesses during the holiday quarter is likely to fuel these concerns.

The increased scrutiny comes as the AI industry faces a potential price war following the emergence of low-cost AI models from Chinese startup DeepSeek. Alphabet's capital expenditure last year is estimated at $50 billion, with further investments planned for 2025 to support its cloud expansion and AI-driven search features.

Despite this hefty investment, Google Cloud growth is expected to decelerate in the fourth quarter, failing to meet the high expectations set for the segment. "Although (the cloud unit's) rate of growth is expected to slow, elevated investment is expected to continue, but efficiency gains have so far kept profits buoyant. Sustaining this balancing act will be critical and investors will want to see evidence of this," said Susannah Streeter, head of money and markets, at Hargreaves Lansdown, to Reuters.

Revenue from Google's Search and Other business is expected to have risen 11.2% in the fourth quarter, a slowdown from the 12.2% increase in the third quarter, according to Visible Alpha estimates. Overall, Alphabet's revenue is projected to grow 11.9% to $96.6 billion, representing a slower growth rate than the previous quarter.

The company is facing increased competition in the search advertising market from companies like Amazon and TikTok. While higher political ad spending around the US Presidential elections may have boosted Google's revenue in the fourth quarter, Meta's subdued first-quarter forecast has raised concerns about the broader ad market outlook.

Investors are particularly focused on Google's cloud business, which saw its fastest growth in two years during the September quarter due to increased AI spending by businesses. Alphabet's shares have risen about 7% this year following a 35% rally last year, driven by investor confidence in the company's AI bets. However, recent lackluster results from Microsoft, where Azure cloud computing growth slowed as the company prioritized AI services, have raised concerns about a potential slowdown at Google. "We're going to want to see if Google has the same issues that Microsoft did where AI was a source of growth, but the core hyperscaler business did poorly. We're going to want to see that that's not the case for Google," said D.A. Davidson analyst Gil Luria, to Reuters.

Despite the slowdown concerns, Google Cloud is still expected to report a strong 32% increase in revenue for the fourth quarter, outpacing the estimated 31% growth of its larger rival Microsoft and the projected 19% increase for Amazon.