Published by Global Banking and Finance Review
Posted on February 3, 2025
By Deborah Mary Sophia and Zaheer Kachwala
(Reuters) - Alphabet will face investor scrutiny over its massive spending on AI when it reports earnings on Tuesday, as revenue growth at the Google parent likely slowed in the holiday quarter due to a slowdown in its advertising and cloud businesses.
Like other U.S. technology heavyweights, Alphabet faces new scrutiny on its capital expenditure after Chinese startup DeepSeek last month launched low-cost AI models that threaten to push the AI industry into a price war.
Alphabet's capital expenditure is estimated to have been $50 billion for last year, according to LSEG, with more planned for 2025 to support its cloud expansion and AI-driven search features, including summaries, which are vital to defending its market share and attracting more ad revenue.
Microsoft and Meta Platforms executives defended their hefty AI spending plans last week, saying they were crucial to staying ahead in the new field.
Meanwhile, Google Cloud growth is expected to decelerate in the fourth quarter amid high expectations for the segment.
"Although (the cloud unit's) rate of growth is expected to slow, elevated investment is expected to continue, but efficiency gains have so far kept profits buoyant. Sustaining this balancing act will be a critical and investors will want to see evidence of this," said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
Revenue from Google's Search and Other business is expected to have risen 11.2% in the fourth quarter, according to Visible Alpha estimates, compared with a 12.2% rise in the third quarter.
Overall, Alphabet's revenue is expected to grow 11.9% to $96.6 billion, slower than the third quarter, according to estimates compiled by LSEG.
The company - whose Search and YouTube services are used by more than 2 billion people each month - is also trying to retain its dominant share in the search advertising market amid rising competition from e-commerce firm Amazon.com and social media apps such as TikTok.
Higher political ad spending around the U.S. Presidential elections may have aided Google in the fourth quarter, after Facebook-owner Meta also reported a similar ad revenue boost.
Still, Meta's subdued first-quarter forecast has sparked concerns over the ad market outlook as economic uncertainty increases with the looming threat of global tariffs.
CLOUD FOCUS
Expectations are high for Google's cloud business after the segment notched its fastest growth in two years in the September quarter thanks to rising AI spending by businesses.
Alphabet's shares have risen about 7% this year, following a 35% rally last year, driven by increasing investor confidence in its AI bets.
Still, worries of a bigger-than-expected slowdown have mounted since last week after lackluster numbers from Microsoft, whose Azure cloud computing growth slowed in the December quarter as it prioritized AI services over core cloud offerings.
"We're going to want to see if Google has the same issues that Microsoft did where AI was a source of growth, but the core hyperscaler business did poorly. We're going to want to see that that's not the case for Google," said D.A. Davidson analyst Gil Luria.
Google Cloud is expected to report a 32% rise in revenue in the fourth quarter, according to LSEG data, after clocking growth of 35% in the third quarter.
That would be faster than much-bigger rival Microsoft's 31% jump and an estimated 19% increase for Amazon.
(Reporting by Deborah Sophia and Zaheer Kachwala in Bengaluru; Editing by Shounak Dasgupta)
