Google's AI Budget Blows Up, Investors Reach for the Exit (-4.5%)

Alphabet, Google’s parent company, recently served up its Q2 earnings, and it was like getting a perfectly cooked steak only to find out it's paired with instant mashed potatoes. 

Sure, they topped earnings estimates, but the stock still dropped 4.5%. So how did the 4th largest company in the world crush its earnings forecasts and still leave investors feeling queasy. Turns out, Alphabet is on track to shell out a mind-boggling $50 billion in capital expenditures this year.

Despite posting solid earnings, Alphabet hinted that its AI spending spree is far from over. They’re like my buddy Steve who keeps buying the latest $500 golf drivers, thinking one will magically fix his horrible slice. Spoiler alert: it never does. 

Alphabet’s spending spree includes a whopping $13 billion just last quarter, pushing their half-year total to a jaw-dropping $25 billion. Analysts, like KeyBanc’s Justin Patterson, are left puzzled, wondering if Google’s revenue growth can keep pace with their tech shopping addiction.

Google's big bet is on AI tech supercharging its search, cloud, and data services. But with YouTube’s ad sales coming up short, it’s like they invested in a blockbuster movie that flopped at the box office. Patterson warns that hefty spending and soft ad sales might spell trouble for 2025 earnings. Alphabet did manage to exceed expectations with a $1.89 per share profit, beating forecasts by a nickel. Revenue also jumped 14% to a cool $84.77 billion. But the real MVP here is the cloud division, with revenues skyrocketing almost 29% to $10.35 billion. 

CEO Sundar Pichai is all in on AI. He’s convinced that skimping on AI would be a bigger disaster than spending big bucks on it. Angelo Zino from CFRA is on the same page, giving Google a thumbs up for its execution and staying hopeful about AI boosting ad revenue and cloud capacity.

(Source: World Economic Forum)

But not everyone’s on the hype train. UBS’s Stephen Ju is skeptical, pointing out that while AI is starting to show some results in search, Google Cloud Platform’s (GCP) AI productization is still a bit iffy. It reminds me of my days as a server at Cracker Barrel when they bought fancy espresso machines that only made a decent cup of coffee half the time—fancy, but not a good ROI.

Despite Alphabet’s stock slipping 4.5%, it’s still up 25% for the year. Analysts are adjusting their price targets, with some trimming a few bucks off and others raising theirs slightly. Translation: No one knows anything.

Unfortunately, the bad news keeps piling up for Google. Their grand plan to kill tracking cookies has crashed and burned, leaving Chrome’s 3 billion users still under the watchful eyes of advertisers. It's like planning a surprise party and then accidentally sending the invite to the guest of honor. Despite teasing a new approach to user privacy, the details are as clear as mud, and regulatory approval is still stuck in the waiting room.

The Privacy Sandbox initiative, meant to replace tracking cookies, seems plagued with false starts. Their efforts to create a more private web are beginning to resemble an endlessly looping infomercial—always promising, never delivering. As privacy advocates and competitors like Apple continue to criticize, Google's commitment to user privacy seems more like lip service than a genuine effort.

Stock.News has positions in Apple and Google.