Alphabet Stock Plunges After Cloud Computing Miss and Spending Surprise: Wall Street Reacts

Alphabet Inc.'s (GOOGL) stock took a nosedive in after-hours trading on Tuesday, following the tech giant's earnings report for the third quarter of 2023. The company's shares fell by more than 6% after it missed expectations for its cloud computing business and announced a significant increase in capital expenditures for the year. Here's a breakdown of the key takeaways from Wall Street analysts regarding Alphabet's earnings report and how their assessments differ from the market's initial reaction.



1. Cloud Computing Miss: Alphabet's cloud computing business, Google Cloud, reported revenue of $8.41 billion, which represented a 22% increase over the third quarter of 2022 but fell short of expectations by about $20 million. This underperformance was a significant factor contributing to the stock price decline. Analysts from firms like Morgan Stanley and JPMorgan Chase & Co. expressed concerns about the cloud business's growth rate and its ability to keep up with market leaders Amazon Web Services (AWS) and Microsoft Azure.
2. Increased Capital Expenditures: Alphabet announced plans to spend $75 billion in capital expenditures this year, with a majority of that spending going toward technical infrastructure such as servers and data centers. This increase in spending was higher than the $58.84 billion that analysts were expecting for the coming year. While some analysts, such as those from Bank of America and Wells Fargo, acknowledged the need for heavy investments in AI infrastructure, others, like those from Morgan Stanley and JPMorgan Chase & Co., raised concerns about the potential impact of these high capital expenses on the company's earnings and cash flow.
3. AI Investments: Alphabet CEO Sundar Pichai emphasized the importance of AI in driving growth across the company's businesses, including Google Cloud. However, some analysts, such as those from Morgan Stanley and JPMorgan Chase & Co., questioned the company's ability to convert its AI investments into revenue and earnings growth, given the emergence of low-cost, open-source AI models like DeepSeek.

The market's initial reaction differed from some analysts' assessments, as many analysts focused on the positive aspects of the earnings report, such as the revenue and earnings beat, while the market seemed more concerned with the underperformance of the cloud business and the potential impact of increased capital expenditures on future earnings. Investors may be waiting for more clarity on the timeline for AI spending to translate into earnings and sales growth before regaining confidence in Alphabet's stock.

In conclusion, Alphabet's increased capital expenditure in AI infrastructure aligns with its long-term growth strategy, but the market's initial reaction to the earnings report highlights investors' concerns about the cloud business's growth rate and the potential impact of high capital expenses on future earnings. As Alphabet continues to invest in AI and cloud computing, investors will be watching closely to see how these investments translate into revenue and earnings growth.