Alphabet shares: Weaker growth in Google's core business alarms the US market
Despite revenue growth, Alphabet missed analysts' expectations, fueling concerns about the profitability of massive AI investments.
Quick Look
- Alphabet reported weaker growth than expected.
- Profit fell by a quarter to $26.2 billion.
- The high investments in AI infrastructure and data centers are causing investors to be skeptical about future profitability.
AI-generated summary
Why It Matters
Alphabet is investing heavily in AI infrastructure and data centers to expand its market position. This spending is now under scrutiny due to high costs and uncertain profit margins.
The company behind Google and YouTube reported weaker growth for the summer than analysts expected. The report reinforced concerns about whether the huge investments in artificial intelligence technologies will even pay off.
Alphabet increased quarterly sales by around 25 percent year-on-year to $127.6 billion (114.4 billion euros), narrowly missing analysts' expectations. The bottom line is that profits fell by around a quarter to just under $26.2 billion. However, Alphabet's profit development now depends heavily on fluctuations in the valuation of investments, for example in the space company SpaceX.
After a real rush to build data centers and equip them with AI chips, these concerns are now weighing on the entire AI industry. On the one hand, there are concerns that the AI revolution may not bring as much profit and productivity as hoped. On the other hand, future data center spending is under pressure as it has become expensive to borrow money to buy more chips.
The S&P 500 fell 0.3 percent, heading for its first loss in four days, while the Nasdaq Composite fell 1.2 percent. However, most other stocks on Wall Street rose and the Dow Jones Industrial Average lost only 0.2% or 104 points towards the afternoon German time. If it hadn't been for Alphabet's decline, the S&P 500 would have been up that day.
Less lucrative AI search
Advertising revenue from Google search – a central source of money for the group – grew by around twelve percent year-on-year to $63.35 billion. That was below the expectations of analysts, who on average had expected around $65 billion.
Sales of cloud services, which the stock market traditionally pays close attention to, more than doubled to $30.7 billion. That was above market expectations. Google develops its own AI models under the name Gemini - and also makes its servers available to other companies for cloud services.
Like other technology giants, Alphabet is pouring tens of billions of dollars into expanding its artificial intelligence infrastructure. In the last quarter, capital investments rose to just over $51 billion from just under $45 billion in the previous three months. Three months ago, Alphabet shocked investors by raising its infrastructure spending range this year to $195 billion to $205 billion.
Open Questions
- When will AI investments turn into measurable profits?
- How are the financing costs developing for additional AI chips?
