Alphabet's Massive AI Investment Raises Concerns Amid Cloud Growth Slowdown

Alphabet, Google's parent company, announced a $75 billion investment in AI for 2025, a 29% increase over Wall Street expectations, but investors reacted negatively to a missed cloud revenue target, sending shares down 9% in after-hours trading.

The $75 billion investment is a significant increase from the $52.5 billion spent in 2024 and well above analyst forecasts of around $58 billion, according to Reuters. CEO Sundar Pichai defended the dramatic increase on a conference call with analysts, citing the rapid advancements in AI and the need to stay competitive.

"The cost of actually using (AI) is going to keep coming down, which will make more use cases feasible," Pichai said. "The opportunity space is as big as it comes, and that's why you're seeing us invest to meet that moment."

However, the company reported a slowdown in cloud revenue growth, a key concern for investors. Google Cloud revenue increased by 30% to $11.96 billion in the fourth quarter, falling short of analysts' expectations of a 32.3% increase. This underperformance comes despite significant investment in AI features within Google's cloud platform.

"When you start to see that revenue level off or at least the growth start to top off a little bit, how you're going to finance the future growth of the company becomes an issue," said Brian Mulberry, client portfolio manager at Zacks Investment Management.

The underperformance in cloud revenue raises concerns about the company's ability to fund its ambitious AI investments. Investors are also wary of Google's track record of utilizing cash for profitability, particularly in light of the emergence of China's DeepSeek, which offers AI at a significantly lower cost.

"It's very hard to defend Google after the earnings report," said Dave Wagner, portfolio manager at Aptus Capital Advisors, to Reuters. "DeepSeek has started to teach the market that maybe some things can be done a little bit more efficiently."

Despite the cloud revenue miss, Google's ad business performed well, with revenue rising by 10.6% to $72.46 billion in the fourth quarter. This growth was driven in part by increased spending on political advertising for the recent US elections. However, this segment faces growing competition from social media platforms like Meta's Facebook and Instagram, as well as ByteDance's TikTok.

Overall, Google's revenue rose 12% to $96.47 billion in the fourth quarter, exceeding analysts' expectations of $96.56 billion. The company also beat profit estimates, reporting earnings per share of $2.15 versus an estimated $2.13.