Alphabet's $75 Billion AI Investment: A Strategic Move Amid Market Concerns

Alphabet Will Spend $75 Billion on Artificial Intelligence (AI) in 2025, but It Spent $69 Billion on Something Else Entirely in 2024 That Makes It Worth Buying and Holding Forever | The Motley Fool

It could spend even more on this investor-friendly category in 2025 as its AI investments start paying off. Newly appointed CFO Anat Ashkenazi told analysts to expect a small step-up in Alphabet's (GOOG -0.54%) (GOOGL -0.49%) capital investments in 2025 during the tech giant's third-quarter earnings call. "Likely not the same percent step-up that we saw between '23 and '24, but an additional increase," she said in late October. Alphabet ended up spending roughly $52.5 billion in 2024, up 62.5% from the $32.3 billion it spent in 2023. So I guess, by comparison, the 43% increase she forecast for fiscal 2025 capital expenditures is merely an "additional increase." Alphabet says it will spend $75 billion on capital expenditures in 2025, most of which will go toward building cloud infrastructure for artificial intelligence training and inference. Prior to Alphabet's updated forecast, Wall Street analysts had expected the figure to be just $58 billion for the year, based on Ashkenazi's previous comments. While Alphabet is spending heavily to support artificial intelligence -- and with good reason -- it spent more than $69 billion on something else entirely in 2024, and it's one of the best reasons for investors to buy shares and hold them forever. Alphabet is far from the only big tech company spending tens of billions of dollars on AI infrastructure this year. And that may be a big reason why it feels the need to spend so much. "The risk of underinvesting is dramatically greater than the risk of overinvesting for us here," CEO Sundar Pichai said during Alphabet's second-quarter earnings call in July. That has actually already shown up in its financial results. The Google Cloud segment's revenue growth decelerated to 30% in the fourth quarter. Many investors were disappointed with that, which is one of the reasons the stock price fell after the earnings report. But Ashkenazi was keen to point out that demand for Google Cloud is outstripping available capacity at the moment and it's working to bring more capacity online as quickly as possible. That means it needs to spend more. The fruits of the spending should appear in short order, as Google Cloud growth should remain strong throughout 2025. Importantly, the company is starting to see returns on its AI spending within its core Google operations as well. AI Overviews, which has expanded to over 100 countries and answers more search queries every day, has helped grow overall search traffic on Google. It recently rolled out ads on AI Overviews, and management says the monetization rate is approximately the same for those ads as for traditional search ads. In other words, Google's product is successfully staving off the threat of other AI tools for information discovery without cannibalizing its ad revenue. Other AI innovations like Circle to Search and Google Lens have further bolstered high-value searches for products or shopping. So, Alphabet is starting to see meaningful returns on its massive AI spending outside of its cloud platform. Even as it spends much more than was anticipated on AI, though, investors should look at how it impacts an even more important factor for the stock. In 2024, the one thing Alphabet spent more on than capital expenditures was capital returns to shareholders. It spent approximately $62 billion buying back shares of its own stock and another $7 billion on dividends. Even with the "additional increase" in capital investments planned for 2025, there's a good chance Alphabet could return even more money than that to shareholders again. That's because it's a free cash flow machine. Its 2024 free cash flow totaled $72.8 billion. And while Alphabet is planning to spend $22 billion more on data centers and the chips and networking equipment that go inside them in 2025, it could still see an improvement in free cash flow this year. As mentioned, Google Cloud's revenue growth is poised to reaccelerate as more capacity comes online. As it scales, it has seen strong operating margin expansion, reaching 14% last year. But larger public cloud platforms have operating margins more than twice as big, indicating Alphabet could see billions more in operating income from Google Cloud in 2025. Further AI-powered improvements in search as well as in ad-buying and creatives could help grow the core business, further offsetting the increased spending on data centers. With plenty of cash already on the balance sheet, it's likely Alphabet will once again route the vast majority of its free cash flow into its capital return program in 2025. The size of Alphabet's share-repurchase program ensures that it will be able to generate strong earnings-per-share growth over the long run even if there are only modest improvements in the business. So while its increased spending on artificial intelligence could weigh on net income in 2025 and beyond as depreciation expenses start hitting the income statement, investors should still see strong improvements in earnings per share. And that extends well into the future, as Alphabet will look to invest in the next thing that could represent a step-change in its business. With the strong free-cash-flow generation from its core operations, plus the growing profitability of its cloud computing business, Alphabet looks poised to increase its capital returns in 2025 and beyond. And that makes it an extremely shareholder-friendly stock to own. Moreover, with shares trading at less than 21 times earnings estimates for the next 12 months, the stock looks like a bargain. It might be worth taking this opportunity to add shares to your portfolio and hold onto them forever.

This Tech Giant Is Investing $75 Billion on AI. Is It Time to Buy? | The Motley Fool

On Feb. 4, Alphabet (GOOG -0.54%) (GOOGL -0.49%) reported mixed performance in the 2024 fourth quarter. Revenue was up 12% year over year to $96.5 billion, lower than the Wall Street target of $96.67 billion. Earnings per share (EPS) rose 31% to $2.15, barely beating analysts' consensus estimate of $2.13. Investors were mainly disappointed with Google Cloud's top line as revenue of $12 billion fell short of the consensus estimates of $12.2 billion. The market has also raised concerns about the future of Alphabet's free cash flows and margins in the face of aggressive plans for capital expenditures (capex) of $75 billion in 2025, a dramatic increase from $52.5 billion in 2024. Not surprisingly, shares are down more than 9% since the earnings release. The stock has also been hurt by Chinese start-up DeepSeek's claims of developing a large language model with capabilities comparable to OpenAI's GPT4 at significantly lower costs. With the market questioning the huge level of AI spending, investors are also concerned about the monetization prospects of Alphabet's chatbot Gemini. Although these challenges cannot be ignored, the business' fundamentals and financials are still strong. The company generated free cash flow of $72.8 billion and returned $70 billion to shareholders in 2024. Here are some other key reasons it can be a smart pick in 2025. Alphabet has been at the forefront of the ongoing AI revolution with its multifaceted strategy. The company unveiled its most capable AI model, Gemini 2.0, in December 2024, mainly to target the rapidly expanding agentic AI market. The company has also released the workhorse Gemini 2.0 Flash model focused on faster movement of data and enhanced performance for developers and customers. And it has been aggressively infusing AI features across all of its seven key products and platforms -- such as search, advertising, and the cloud -- to increase usage and expand possible functions for its AI. The adoption of this technology has been a major growth catalyst for its cloud business, whose customers are using computing capacity over eight times more for AI training and inferencing compared to 18 months ago. And management has been working on leveraging AI capabilities to optimize efficiency across its entire technology stack, which includes hardware, software models, and products. With Alphabet gearing up to spend $75 billion in capex mainly on technical infrastructure, including data centers and servers, the company may see much faster growth for the now capacity-constrained Google Cloud. Margins may also improve, as management prioritizes AI technologies that enable cost efficiencies. Alphabet's core business continues to impress despite rising competition from AI players. Google Search revenue was up 12.5% year over year to $54 billion, while YouTube advertising sales jumped 14% to $10.5 billion in the fourth quarter. Google Search has demonstrated exceptional strength in financial services (insurance) and retail verticals (especially during the holiday shopping season). The integration of Gemini-powered AI Overviews in search across more than 100 countries has also been a key in driving up usage and user satisfaction for Google Search. This effect is especially pronounced with younger users who are learning to ask new questions and are impressed with AI Overviews' efficiency and speed. Alphabet has also made Circle to Search (touch-screen enabled search functions) available on more than 200 million Android devices -- further driving mobile use of Google Search. Each day, YouTube content was streamed for over 1 billion hours globally on televisions in 2024, making it the leading streaming service in the U.S. based on viewing time. YouTube has been successful with its short-form videos and podcasts. Connected television accounted for almost 15% of Shorts viewing in the U.S. at the end of 2024. Alphabet shares are trading at nearly 23 times forward earnings, which is reasonable considering the S&P 500's forward price-to-earnings ratio (P/E) of 22.5. Several other reasons show the potential for improvement in the company's valuation multiples in the coming months. Analysts expect revenue and adjusted earnings per share to grow year over year by 11.4% and 11.8%, respectively, in fiscal 2025. Although those estimates may seem modest, they are impressive for a company of Alphabet's scale and geographic reach. The company generated nearly $100.2 billion in net income while its operating margin was a solid 32% in fiscal 2024. It also has a strong balance sheet with $96 billion in cash and marketable securities. Google Cloud is the No. 3 player in the global cloud infrastructure services market, accounting for an 11% share in the fourth quarter of 2024. It demonstrated impressive growth in the quarter, despite capacity constraints. The core Search and YouTube businesses also reported robust growth. Lastly, the company's autonomous driving division, Waymo, has also seen dramatic progress in 2024, by reaching a milestone of safe completion of more than 4 million passenger trips. The service is seeing increased adoption, with an average of over 150,000 trips every week. The planned $75 billion capex for 2025 may seem concerning in the short run, but it could be a major growth catalyst in the long run. Hence, considering all these tailwinds, Alphabet seems like a compelling buy in 2025.

Alphabet Looks Like an AI Underdog, but Here's Why Its Stock Could Be Worth Buying Now | The Motley Fool

The tech conglomerate, which first applied AI to its search engine in 2001, appeared to have lost a step in the AI race, when OpenAI released GPT-4o in 2023. Moreover, a recent commitment to invest heavily in capital expenditures (capex) -- most of which is presumably related to AI -- seemed to scare investors more than it reassured them. Nonetheless, its longtime focus on AI technology and its vast resources will probably show that Alphabet can still compete in this field. Here's why Alphabet bulls should probably stay the course with its stock. The market's reaction to Alphabet stock is a bit of an enigma. The search- and YouTube-driven digital ad business and Google Cloud generated nearly all the company's $350 billion in revenue in 2024, and AI played a significant role in that success. In addition, the growth of Google Cloud and investments in numerous other businesses signaled that the company has long planned to reduce the share of revenue driven from its legacy platforms. Still, Alphabet analysts appeared caught off guard by the release of GPT-4o. Upon its release, the rhetoric seemed to turn against the Google parent, as some analysts questioned whether the dominant Google search engine would fall out of favor. Even when Alphabet released its own generative AI platform, Google Gemini, it did not appear to ease concerns. More recently, Alphabet stated in its earnings report for the fourth quarter of 2024 that it would invest $75 billion in capital expenditures. This is up from the nearly $53 billion spent in 2024 and $32 billion allocated in 2023. Admittedly, that is a staggering investment that few other AI companies can afford. Still, with competitors spending heavily on AI, Alphabet will likely have to invest in itself if it wants to remain a relevant force in this industry. However, the negative AI news has not hurt its stock as much as some might assume. Since the release of GPT-4o on May 13, 2023, Alphabet stock has earned a total return of 65%. That lags the return of other AI stocks such as Nvidia or Palantir. Still, it came out slightly ahead of the S&P 500 (^GSPC 1.04%). Additionally, Alphabet can probably afford this investment. Indeed, it spent $62 billion on share repurchases in 2024, and its dividend is on track to cost the company $10 billion annually. Nonetheless, Alphabet holds almost $96 billion in liquidity. Moreover, the company generated nearly $73 billion in free cash flow in 2024, an amount not including the capex spending. That would allow Alphabet to maintain the same pace of spending for years without having to add debt. Furthermore, the capex investments will likely deliver returns that increase the company's free cash flows over time. While that leaves shareholders with some uncertainty, it is highly likely that Alphabet will remain competitive in the AI industry for some time to come. Although Alphabet's actions may indicate it is a slight underdog in the AI race, it is much too early to count out the tech conglomerate. A pivot away from search in favor of AI could reduce usage of Google platforms and, by extension, its ad revenue. However, the company has long planned such a transition, meaning it is better positioned to deal with this disruption than some analysts may assume. Additionally, the company holds tremendous resources and could likely afford the investments necessary to stay competitive. When also considering Alphabet's low valuation, it is likely investors can prosper by adding shares now.

Alphabet's Revenue Miss in Q4 Isn't the Only Reason Investors Should Be Concerned About the Stock | The Motley Fool

Shares of Alphabet (GOOG 1.32%) (GOOGL 1.38%) have been falling in recent days after the company released its earnings numbers. Investors are bearish on the tech giant after it missed expectations for revenue. While the miss on the top line isn't great news, and it may weigh on the stock in the short term, another number could end up being more concerning for Alphabet investors this year: The amount it has planned for capital expenditures. On Feb. 4, Alphabet reported its latest earnings numbers, for the last three months of 2024. Sales totaled $96.47 billion and rose 12% year over year. More importantly, however, those numbers came in lower than the $96.56 billion analysts were expecting for the period. And when expectations are high for a company like Alphabet, any miss can lead to a drop in the share price. The bigger issue that may also worry investors is that the company is planning to spend $75 billion on its capital expenditures in 2025. That's a significant 43% increase compared with the $52.5 billion that it spent in 2024. The company is investing heavily in artificial intelligence (AI) as it looks to enhance its offerings with next-gen technologies. This, however, comes at a time when many investors are growing concerned about how aggressively tech companies are spending on AI. Last month, Chinese AI company DeepSeek released an AI model which it said cost a fraction of what it took to create ChatGPT and yet performed similarly to the popular chatbot. Tech companies have been spending aggressively on AI as they look to keep up with their rivals. But the danger is that all that spending may not yield better results, at least not for a while. Last year, Alphabet CEO Sundar Pichai warned that 2025 could be a slow year for the development of AI, saying that the "low-hanging fruit is gone" and that "the hill is steeper." Amid more challenging economic conditions, companies may also significantly scale back their AI-related projects and expenditures. Research company Gartner projects that by the end of this year, as many as 30% of generative AI projects may become abandoned, as businesses may give up due to rising costs or not seeing a clear payoff from their investments. Spending heavily on capital expenditures and bringing on more staff may result in cost reductions and layoffs later on, as has sometimes been the trend in tech when it comes to overspending. While there are opportunities in AI, it can be easy for companies to get ahead of themselves and spend too feverishly. There is a risk that Alphabet could end up overspending on AI, but I believe the net benefit will be a positive one for investors. Even if its AI spending doesn't result in game-changing products and services right away, there's a lot of potential for Alphabet in bolstering and enhancing assets like Google Search and YouTube with the help of AI. Alphabet's stock currently trades at a relatively modest 23 times its trailing earnings. That's cheap compared to the average stock in the Technology Select Sector SPDR Fund, which trades at 39 times its profits. There might be some adversity ahead for Alphabet. But as long as you are comfortable with some short-term risk, the tech stock can still be an excellent investment to hold on to, especially over the long run.