The stock of Alphabet took a major hit after its fourth-quarter earnings report failed to meet the expectations of Wall Street. Its shares dropped 8% in pre-market trading as investors reacted to a slowdown in its cloud computing business and unexpectedly high capital expenditure forecast for 2025.
The biggest concern was the revenue growth of Google Cloud that decelerated from 35% in the previous quarter to 30%. It mirrored similar slowdown in the cloud business of Microsoft and raised broader concerns about the industry. Alphabet CFO Anat Ashkenazi attributed the slowdown to being “capacity constrained” and this means that the demand exceeded their current infrastructure capabilities.
The plan of Alphabet to spend $75 billion on infrastructure in 2025 is also adding to the worries. It is significantly above the expected $60 billion. It is aggressively investing in AI infrastructure to strengthen its cloud business.
The core businesses of Alphabet performed well despite the cloud disappointment. Google Search revenue grew 13% and YouTube ad sales increased by 13.8%. However, the positive results were not enough to offset concerns over the cloud slowdown and rising costs.
The Gil Luria of DA Davidson maintained a neutral stance and it noted that the cloud slowdown remains a challenge. The Doug Anmuth of JP Morgan lowered his price target and this cites concerns over rising expenses as well as slowing cloud growth. The Brad Erickson of RBC witnessed the market reaction as an overcorrection.
The company now is in a tough spot and investor skepticism may continue to weigh on the stock if it fails to accelerate cloud growth in the coming quarters. Alphabet could turn this setback into a long-term win if its AI and cloud strategies start delivering strong results.