Alphabet stock fell about 7% in pre-market trading Wednesday.
The cause? Alphabet – shares of which have risen 43% in the last year – was hit by what I call the beat-and-raise rule: If a company beats investors’ revenue and profit expectations and raises its forecasts, its stock usually pops – if not, the stock likely falls.
Alphabet disappointed and its stock price fell. Shares of Alphabet lost “as much as 9% Tuesday after the company reported fourth-quarter results that missed on revenue expectations,” according to CNBC.
Investors focused most intensely on Alphabet’s cloud services business which generated lower-than-expected revenue and aims to spend $75 billion – about $16 billion more than Wall Street expected — to “expand on its artificial intelligence strategy,” noted CNBC.
Does the dip in Alphabet stock represent a buying opportunity? Wall Street sees some upside to the stock. Other analysts are struggling to take a bullish stance. Yet the stock may rise if the company’s enormous bet on AI results in faster-than-expected growth.
Alphabet’s Disappointing 2024 Fourth-Quarter Performance and Prospects
While Alphabet’s earnings per share beat expectations in Q4, the company’s revenue performance and forecast disappointed analysts.
While EPS beat analysts’ estimates by two cents, Alphabet’s overall revenue grew more slowly than in the prior year – as did growth for the company’s search business, YouTube ads business and services unit, noted CNBC.
Here are the key numbers:
- Q4 2024 revenue: $96.47 billion – up 12% from the previous year and $90 million short of London Stock Exchange Group expectations.
- Q4 net income: $26.54 billion – 28% more than the previous year, noted CNBC.
- Q4 Google Cloud revenue: $11.96 billion – up 30.1% from the previous year and $490 million short of StreetAccount estimates.
- Q4 2024 YouTube advertising revenue: $10.47 billion – up 13.8% and $240 million more than StreetAccount expectations.
- Q4 2024 capital expenditure: $14 billion – $730 more than the StreetAccount consensus.
- Q4 earnings per share: $2.15 – two cents ahead of what LSEG expected.
- 2025 capital expenditure forecast: $75 billion – up 42.9% from the year before and $16.1 billion more than the $58.84 billion that Wall Street expected, according to FactSet.
Alphabet’s high capital expenditure are aimed at building more computing capacity to meet demand for cloud services. The capital will pay for servers and data centers “to support the growth of our business across Google Services, Google Cloud and Google DeepMind,” CFO Anat Ashkenazi told investors on the company’s Q4 earnings call, CNBC reported.
Moreover, Alphabet says if lacked capacity to meet 2024 demand for cloud services. Alphabet – whose Google Cloud “trails behind Amazon.com and Microsoft in size,” noted Bloomberg – “exited the year with more demand than we had available capacity. We are in a tight supply-demand situation, working very hard to bring more capacity online,” Ashkenazi added.
Alphabet’s AI Strategy
Alphabet’s AI strategy is strong – but it could be better. Since Google scientists developed the transformer model on which generative AI depends, the company should lead the world in AI chatbots as the company does in search. Sadly for Alphabet investors, most of those scientists departed for startups, I wrote in my book, Brain Rush.
Alphabet has faced questions about Chinese startup DeepSeek – which last month launched powerful models built at a lower cost than their American equivalents. DeepSeek’s chatbot app leaped ahead of ChatGPT and Google’s Gemini to top the app store rankings, according to the Wall Street Journal.
Alphabet expressed confidence in the company’s AI strategy. Google’s Gemini AI leads the market and the company has reduced costs, says Google. “All of that sets us up well for the workloads ahead, both to serve billions of users across our products and on the cloud side,” CEO Sundar Pichai told investors in the conference call, noted the Journal.
Google – which said 4.4 million developers are using Gemini models, twice the number in October 2024 – expects its costs to plunge. “Our obsession with cost per query, I think, sets us up well both to serve billions of users across our products and on the cloud side,” Pichai said.
“Part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases because the cost of actually using (AI) is going to keep coming down, which will make more use cases feasible. And that’s the opportunity space. It’s as big as it comes, and that’s why you’re seeing us invest to meet that moment,” he added, according to Investor’s Business Daily
Where Will Alphabet Stock Go Next?
Wall Street is moderately bullish on Alphabet stock. Based on 31 Wall Street analysts offering 12 month price targets, Alphabet Class A stock could rise 5.3% to reach the average price-per-share target of $217.22, noted TipRanks.
Google “Cloud’s disappointing results suggest that A.I.-powered momentum might be beginning to wane just as Google’s closed-model strategy is called into question by DeepSeek,” Emarketer analyst Evelyn Mitchell-Wolf wrote in a note featured by the New York Times.
The market may lose enthusiasm for high capital expenditures, said one analyst. “It’s very hard to defend Google after the earnings report,” Aptus Capital Advisors portfolio manager Dave Wagner told Reuters.
“DeepSeek has started to teach the market that maybe some things can be done a little bit more efficiently. Maybe we’re starting to see the market dislike the continued increase in capex,” he added.
Another analyst was disappointed with Google Cloud’s slower growth. “When you start to see that revenue level off or at least the growth start to top off a little bit, how you’re going to finance the future growth of the company becomes an issue,” Zacks Investment Management client portfolio manager Brian Mulberry told Reuters.
Alphabet stock could rise if the company’s high capital expenditures result in faster-than-expected growth. That would happen sooner if Google could supply a missing killer app for generative AI.
However, if Pichai is right about Gemini’s prospects, buying the stock now might be a bet on market-beating investment returns.
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