Alphabet's revenues beat forecasts, but investors were alarmed by a sharp rise in AI costs

Alphabet, Google's holding company, reported strong second-quarter sales thanks to the artificial intelligence boom, but the price is skyrocketing costs. Now management has to convince investors to make multi-billion dollar investments to avoid falling out of the race for AI leadership.

Alphabet said in its quarterly report that its capital expenditures in 2025 will reach $85 billion - $10 billion more than planned. After the publication, the company's shares initially fell in the postmarket, but quickly recovered the fall and ended additional trading in the plus by 1.8%. Quotes recovered when Alphabet CEO Sundar Pichai reassured market participants that the additional spending was justified, reports Bloomberg. "Our investments in AI infrastructure are critical to meet growing demand from cloud customers," Pichai said on a conference call with analysts and investors.

The last quarter for Alphabet turned out to be successful in almost all directions. The company's revenue, excluding payments to partners, rose to $81.7 billion - significantly higher than the consensus forecast of analysts Bloomberg ($79.6 billion). Sales of Google Search reached $54.2 billion against Wall Street expectations of $52.9 billion. YouTube, Alphabet's most important source of advertising revenue, also performed well. The video service earned $9.8 billion against the forecast of $9.6 billion thanks to leadership in the streaming segment and investments in podcasts. Google's cloud division also beat Wall Street estimates, posting a $2.8 billion operating profit and $13.6 billion in revenue. It's the cloud that is now Alphabet's main growth driver, offsetting the slowdown in traditional search, notes Bloomberg. The only disappointment was the experimental Other Bets business, which includes Waymo's robot cab, with revenue of $373 million on a forecast of $429.1 million.

As OpenAI, Microsoft, Meta Platforms and others continue to invest heavily in AI, Alphabet has little choice but to follow suit, says Forrester analyst Nikhil Lai. The race is particularly critical for Google, with competitors developing chatbots that could potentially attract consumers more than its core search product. "Because of OpenAI, Google has to spend huge sums on infrastructure and AI applications," stated Lai.

Strong Google Search sales last quarter should reassure investors worried that ChatGPT could take search traffic away from Google, said Daniel Morgan, senior portfolio manager at Synovus Trust Company, to MarketWatch.

Investors are worried about the possible consequences of an antitrust case against Google that threatens its dominance in the Internet search market. As early as August, a US court is expected to decide whether to impose restrictions on Google, including how exactly it will be able to compete in the field of artificial intelligence. The U.S. Justice Department filed a lawsuit against the company back in 2020, demanding that it be forced to sell its Chrome browser, barred from paying Apple for its default search engine status, and forced to share data with competitors. 

Google stated that the DOJ's approach would lead to "unprecedented government intervention that will hurt American consumers, developers, and small businesses - and jeopardize U.S. global economic and technological leadership at a time when it is needed more than ever."

Analysts at Cantor Fitzgerald are maintaining a "neutral" recommendation on Alphabet shares until they "get clarity" on the antitrust ruling against the company, reports Forbes. Bank of America noted last week that the court's decision is "a question everyone would like to ask, but one that Google can't answer yet." 

This article was AI-translated and verified by a human editor