Alphabet Reports Q4 Earnings: Mixed Results and Heavy AI Investments Weigh on Stock

Alphabet (GOOGL) delivered a mixed fourth-quarter earnings report, with earnings per share (EPS) exceeding expectations while revenue slightly missed Wall Street forecasts. The company’s aggressive capital expenditure plans and cloud business underperformance appear to have spooked investors, sending shares down about 7% in after-hours trading. This comes after Alphabet stock reached all-time highs leading up to the report, having gained 9% in 2025.

EPS and Revenue Performance

Alphabet reported EPS of $2.15, surpassing the FactSet consensus estimate of $2.13. Revenue came in at $96.47 billion, narrowly missing expectations of $96.62 billion. Despite the revenue shortfall, key business segments like search and YouTube ads outperformed, while cloud and other revenue streams fell short.

Key revenue breakdowns:

- Google advertising revenue: $72.46 billion (beat expectations of $71.73 billion)

- Google Search & Other revenue: $54.03 billion (beat estimates of $53.29 billion)

- YouTube ads revenue: $10.47 billion (beat estimates of $10.22 billion)

- Google Network revenue: $7.95 billion (missed expectations of $8.14 billion)

- Google Subscriptions, Platforms, and Devices revenue: $11.63 billion (missed estimates of $12.03 billion)

- Google Cloud revenue: $11.96 billion (missed estimates of $12.19 billion)

- Other Bets revenue: $400 million (well below estimates of $591.9 million)

AI, Search, and Cloud Performance

Artificial intelligence remains a major focus for Alphabet, both as a tool to enhance its core businesses and as a capital-intensive investment area. The company emphasized AI’s role in improving search functionality, ad monetization, and cloud computing.

- Search: Google Search & Other revenue increased by 12.5% year-over-year, slightly ahead of expectations. Alphabet highlighted that AI Overviews, which integrates AI-generated responses into search results, had expanded to over a billion users by the end of December. CEO Sundar Pichai reassured investors that AI-driven search remains highly monetizable, stating that ad revenue from AI Overviews is “approximately the same” as traditional search ads.

- YouTube: Ad revenue grew 14% year-over-year, with YouTube Shorts gaining momentum as a monetizable platform. The company reported a 30-percentage-point improvement in short-form video monetization rates relative to long-form content.

- Cloud: Revenue in Google Cloud grew 30% to $11.96 billion but missed estimates of $12.19 billion. CFO Anat Ashkenazi noted that cloud growth is closely tied to capacity expansion, and the company exited Q4 with more demand than available compute resources. This aligns with Microsoft’s recent comments about GPU shortages limiting AI-driven cloud growth.

Capital Expenditures and Cost Concerns

A major point of concern for investors was Alphabet’s 2025 capital expenditure (capex) forecast of $75 billion, significantly above the $57.9 billion analysts expected. The company’s aggressive spending plans are focused on expanding AI infrastructure, including data centers and specialized AI chips.

- Alphabet’s Q4 capex reached $14.28 billion, above the estimated $13.21 billion.

- Depreciation is expected to grow 28% year-over-year in 2024, with an even faster acceleration in 2025.

Management defended the increased spending by pointing to efficiency gains from its AI-driven infrastructure. Pichai emphasized that Alphabet’s custom Tensor Processing Units (TPUs) help manage AI workloads at lower costs compared to competitors. However, concerns remain that the rising capital intensity could pressure profit margins.

DeepSeek and AI Competition

The rise of DeepSeek, a Chinese AI platform that reportedly rivals OpenAI’s ChatGPT at a fraction of the cost, has raised concerns about Alphabet’s competitive positioning in AI. Pichai addressed these concerns on the earnings call, noting that Google’s Gemini 2.0 models are “some of the most efficient” AI models available. He emphasized Google’s advantage in full-stack AI development and cost-per-query optimization, positioning the company for long-term competitiveness.

Other Key Metrics

- Operating income came in at $30.97 billion, slightly above the $30.72 billion estimate.

- Operating margin was 32%, in line with expectations.

- Traffic acquisition costs (TAC) rose 6.2% to $14.85 billion but remained below estimates of $15.03 billion.

- Sales and marketing costs dropped 4.6% to $7.36 billion, significantly lower than expectations of $7.94 billion.

- Alphabet repurchased $15.55 billion of stock in Q4.

- The company’s workforce increased for the second straight quarter, with net hiring of 821 employees, bringing the total headcount to 183,323.

Market Reaction and Outlook

Despite the earnings beat, Alphabet’s stock fell about 7% in after-hours trading, struggling to hold support near $188. The primary driver of the sell-off appears to be concerns over ballooning capital expenditures and the cloud revenue miss. Investors are wary that Alphabet’s aggressive AI investments may not yield immediate returns, particularly as competition from OpenAI, Microsoft, and now DeepSeek heats up.

Looking ahead:

- Alphabet’s strong ad revenue growth, especially in search and YouTube, provides a solid foundation.

- AI-related investments could drive long-term gains, but near-term profitability remains uncertain.

- Cloud growth, while strong, needs more capacity expansion to meet demand.

- Rising expenses and capex will be a key area of focus for investors in 2025.

Overall, Alphabet’s Q4 report demonstrated solid execution in its core businesses but raised new questions about the pace of AI-related spending and cloud monetization. The stock reaction suggests investors were hoping for more balanced growth without such a steep increase in investment commitments. The coming quarters will be critical in proving whether Alphabet can efficiently translate its AI spending into sustained profitability.