"What to Do? — Buy": Why Aren't Analysts Concerned About Google's Rising Capital Expenditures?

Despite the growth in revenue and profits, Wall Street analysts reacted mixed to Alphabet’s latest financial results: Several of them lowered their price targets for shares of Google’s parent company due to its plans to increase capital expenditures on artificial intelligence. Alphabet raised its capital expenditure forecast for 2026 from $190 billion to a range of $195 billion to $205 billion. The company also reported negative free cash flow for the first time, showing investors that it is spending more on AI than it is earning. This led to a 6.5% plunge in its stock on July 23—at one point, Alphabet’s shares fell by more than 7%, hitting their lowest level since April.

— “Investors seem to be focused on the sharp rise in capital expenditures and the weaker profitability outlook. At the same time, the ongoing delays with [the launch of the new AI model] Gemini 3.5 Pro and the lack of major product releases are raising questions about whether Alphabet’s investments in AI are already translating into a clear competitive advantage,” Ben Barringer, head of technology research at Quilter Cheviot, told CNBC.

— JPMorgan analyst Doug Anmuth lowered his price target for Alphabet shares from $460 to $420 per share following the earnings report, while maintaining an “Overweight” rating (equivalent to a “buy” recommendation), according to CNBC. This is nearly 23% above the closing price on July 22. “We would buy Google shares on a pullback. We continue to believe that Google is realizing returns on its AI investments, and its differentiated, end-to-end positioning is evident in how the company monetizes AI in the cloud, search, subscriptions, and other parts of the business,” the TV channel quoted the analyst as saying.

— Piper Sandler analyst Thomas Champion lowered his price target for Alphabet shares from $445 to $395, while maintaining an “Outperform” rating. This is 15.5% above Wednesday’s closing price. “Google’s advertising business is growing well, and its cloud service is expanding at a tremendous pace. But to justify a [P/E—price-to-earnings] ratio of more than 25 based on expected 2027 earnings, the company needs to have a leading-edge AI model. We’re expecting the release of Gemini 3.5 Pro, followed by 4.0,” he said.

— Alphabet appears poised to grow through its AI initiatives in the long term, even though investments in this area are likely to limit the stock’s growth in the short and medium term, according to Roth analyst Rohit Kulkarni. He maintained a “buy” rating on Alphabet shares with a price target of $440 per share, which is 29% above Wednesday’s closing price. “We are increasingly concerned about the long-term structural capital requirements necessary for Google to continue to succeed. But we view the rise in capital expenditures as necessary to capture the rapidly expanding total addressable market for AI,” Kulkarni wrote in a note to clients, as quoted by CNBC. “What should you do now? Buy the dip, as revenue forecasts continue to rise.”

— Despite investors’ concerns, Alphabet’s stock could still rise to $420, according to Evercore ISI analyst Mark Mahaney. He maintained his price target and “Outperform” rating for Google shares (which is equivalent to a “buy” recommendation). “We have moderately raised our revenue and operating profit forecasts, although we have also increased our projected negative free cash flow for 2027 from $20 billion to $50 billion due to a higher capital expenditure forecast, — Mahanai’s note states — “The latter triggered a moderate sell-off in the stock. Our view is that the core long-term investment thesis for Google remains fully intact.”

— Citizens analyst Andrew Boone’s price target of $515 implies a 51% upside for Alphabet shares from Wednesday’s closing price. He maintained his “Outperform” rating. “The key question is not the absolute level of capital expenditures on AI, but whether the returns justify further investment,” Boone wrote in a note cited by CNBC. “Our view is that the economics of AI infrastructure look attractive enough that the return threshold for continued investment remains high. This supports the argument for maintaining elevated capital expenditures on AI across the entire industry, rather than seeing them decline anytime soon.”

— Pivotal Research analyst Jeffrey Vlodarchak raised his price target for Alphabet shares from $470 to $475, maintaining a “Buy” rating, according to CNBC. “We continue to believe that Alphabet is best positioned among its peers to monetize its massive investments in AI across all its products—thanks to its proprietary stack [chips] and its significant cost advantages over competitors like Microsoft, as well as its dominant distribution channels and strong AI capabilities. This should allow the company to gain market share and establish Gemini as the dominant AI platform on more than 4 billion smartphones,” the analyst wrote.

Google's parent company reported strong financial results for the second quarter, but investors were concerned that one of the leaders in the AI race reported negative free cash flow for the first time due to high spending on AI development and data center construction. Moreover, the company has no plans to slow down: Alphabet raised its capital expenditure forecast for 2026 from $190 billion to a range of $195 billion to $205 billion.

Along with Alphabet, another major U.S. company—Tesla—released its earnings report on Wednesday. Its adjusted earnings for the second quarter fell significantly short of Wall Street estimates.

Both companies alarmed investors by spending more cash than they earned last quarter due to massive investments in artificial intelligence infrastructure, according to Reuters. Investors had valued the hyperscalers’ stocks at high multiples, counting on significant revenue growth, but now some of these companies are spending more on investments than they are generating in cash from operations, the agency explains.

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