Alphabet Faces Investor Scrutiny Over AI Spending as Revenue Growth Cools

Alphabet Inc. (GOOG) is set to face investor scrutiny over its massive investments in artificial intelligence (AI) when it reports earnings on Tuesday. The Google parent company is expected to post a slowdown in revenue growth during the holiday quarter due to a decline in its advertising and cloud businesses.

AI Expenditure Under Microscope

Like other tech giants, Alphabet's capital expenditure has come under heightened examination after Chinese startup DeepSeek introduced low-cost AI models, potentially triggering a price war in the AI sector. Alphabet's capital expenditure reportedly reached $50 billion in 2023, with further plans for 2025 to bolster its cloud expansion and AI-powered search features. These investments are crucial for defending market share and driving ad revenue.

Cloud Growth Concerns

Google Cloud's growth is projected to decelerate in Q4 despite high expectations. Susannah Streeter, head of money and markets at Hargreaves Lansdown, highlights the need for Alphabet to demonstrate both continued investment and efficiency gains to maintain profitability.

Search Revenue Outlook

Revenue from Google's Search and Other segment is estimated to have increased by 11.2% in Q4, slightly slower than the previous quarter's 12.2% growth rate, according to Visible Alpha estimates. Alphabet's overall revenue is projected to grow by 11.9% to $96.6 billion, a slower pace than in Q3.

Search Market Competition

Alphabet faces challenges in maintaining its dominance in the search advertising market amid increasing competition from Amazon and social media platforms like TikTok. However, higher political ad spending during the U.S. presidential elections may have boosted Google's Q4 revenue, similar to Facebook-owner Meta.

Cloud Focus

Expectations are high for Google's cloud business, which reported its strongest growth in two years in Q3 due to increased AI spending by enterprises. Despite concerns about a slowdown, Google Cloud is projected to deliver a 32% revenue increase in Q4, outpacing Microsoft's Azure and Amazon.

Investor Sentiment

Alphabet's shares have gained approximately 7% this year, following a 35% rally in 2023. While investor confidence in the company's AI investments remains strong, concerns about a potential slowdown have emerged after Microsoft's lackluster earnings report. Analysts will be keen to assess whether Google faces similar challenges with its core cloud business.