Alphabet’s stock fell over 3% on Wednesday because investors are worried that the company’s heavy spending on AI infrastructure will hurt profit margins. YouTube is also facing stiff competition for advertising dollars.
In the second quarter, Alphabet’s capital expenditure increased more than expected to $13.2 billion as the company invests heavily in infrastructure to support generative AI services and compete with Microsoft. Despite cutting costs through layoffs to maintain profitability, analysts said that hiring new graduates and an earlier-than-usual launch of the Pixel phone will impact margins in the third quarter.
YouTube is struggling with tough comparisons to last year and competition from other platforms like Amazon.com. YouTube’s ad sales grew 13% in the second quarter, down from nearly 21% in the first quarter. Bernstein analysts noted that management seemed cautious about the outlook for the second half of the year, suggesting either a conservative approach or potential challenges ahead for digital advertising.
Shares of other digital ad-dependent companies like Meta Platforms, Snap, and Pinterest also dropped between 3.2% and 4% as Alphabet’s core Search business growth slowed, even though it beat estimates.
On Wednesday, Alphabet was set to lose around $60 billion in market value. Despite the decline, its stock has risen about 30% this year, thanks to a surge in AI-related stocks.
Many analysts remain positive about Alphabet, highlighting that its AI initiatives are boosting cloud revenue without significantly impacting Search revenue. Revenue from cloud services grew 28.8%, surpassing expectations and indicating strong enterprise spending.
Piper Sandler analysts continue to view Google as a leader in AI and are encouraged by improvements in its core products. At least 25 brokerages raised their price targets for the stock, with the median target now at $204. Alphabet’s 12-month forward price-to-earnings ratio is 22.2, compared to AI chip company Nvidia’s 38.6, according to LSEG data.
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