Alphabet investors were taken by surprise as the search giant topped second-quarter earnings expectations, only to see its shares fall about 5% due to lower-than-expected YouTube advertising revenue. This change in revenue dynamics has prompted the company to highlight plans to boost capital expenditures, particularly in the realm of artificial intelligence (AI).
Chief Financial Officer Ruth Porat revealed that Alphabet plans to spend $12 billion each quarter on AI as it strives to meet the increasing demand in this field. CEO Sundar Pichai emphasized during an earnings call that the risk of underinvesting in AI is far greater than that of overinvesting. However, Wall Street analysts are preparing for potential choppiness in the near term, given tough advertising comparisons and other market factors.
Analysts’ Perspectives on Alphabet’s Prospects
Despite a long-term bullish stance on Alphabet’s AI potential, analysts are divided on the company’s short-term outlook. Some analysts, such as Bernstein’s Mark Shmulik, believe that Alphabet is “treading water” amidst fears from investors and a challenging second half of the year. Jefferies analyst Brent Thill sees Alphabet as a leading player in AI but anticipates difficulties in the advertising landscape.
On the other hand, some analysts view Alphabet’s increased spending on AI as a smart move to “future proof” its business. Deepwater Asset Management’s Gene Munster sees the uptick in spending as essential for Alphabet’s ongoing success. He remains optimistic about double-digit growth in search and YouTube for the company. Goldman Sachs analyst Eric Sheridan and Bank of America’s Justin Post also share a positive outlook on Alphabet’s positioning in the computing and AI landscape.
While it may be premature to determine the return on Alphabet’s AI investments, Truist’s Youssef Squali sees promising signs from higher engagement trends. Despite challenges in second-half comps and YouTube revenue growth, Citi’s Ronald Josey maintains a buy rating and has raised his price target, signaling confidence in Alphabet’s future growth potential. The company’s strong search results and advancements in AI tools are seen as key factors driving its success.
Alphabet’s journey in navigating volatility in AI investments comes with both challenges and opportunities. While the company faces short-term pressures and market uncertainties, its strategic investments in AI and technology infrastructure position it well for long-term success. As Alphabet continues to evolve and innovate, investors will need to assess the company’s resilience and adaptability in an ever-changing market landscape.