Alphabet Falls on Cloud Growth Fears

Here’s our initial take on Alphabet‘s (GOOG -7.03%) fourth-quarter financial report.

Key Metrics

Alphabet Can’t Grow Fast Enough to Keep Wall Street Happy

Alphabet’s fourth-quarter financials showed solid gains. Overall sales growth of 12% came in just shy of the consensus forecast among those following the stock, with Google Search, YouTube, and various other services helping to produce consistent growth. Net income climbed 28% year over year, and a modest decline in outstanding shares helped boost earnings-per-share figures at an even faster 31% rate.

Many investors are watching the Google Cloud business closely, seeing it as the main growth driver to offset any competitive challenges to Alphabet’s core search business. Gains of 30% in segment revenue reflected the success of the Google Cloud Platform and various new initiatives, including artificial intelligence infrastructure and generative AI solutions. However, Alphabet shareholders had anticipated Google Cloud revenue well above the $12 billion mark, making the actual figures a bit of a disappointment.

Immediate Market Reaction

Investors weren’t pleased with Alphabet’s missed targets. The tech stock moved sharply lower, down as much as 7% in the first half hour of the after-hours session following the close of regular trading Tuesday afternoon.

However, the news from Alphabet wasn’t all that surprising in the context of recent events. Rival Microsoft (MSFT 0.20%) also had trouble meeting high expectations from Wall Street for its cloud business when it released its own quarterly report last week. Even with the after-hours declines, Alphabet shares still trade slightly higher than where they started the year.

What to Watch

Stocks rise and fall in the short run based on quarterly results, but Alphabet still seems to be participating fully in the AI boom. CEO Sundar Pichai called out Alphabet’s AI leadership, including AI-driven search overviews and the pervasiveness of artificial intelligence-related features across Alphabet’s product and services suite.

AI initiatives won’t come cheap, though, as Pichai predicted capital expenditures of $75 billion in 2025. For now, most investors are happy to see Alphabet participating fully in AI expansion. At some point, though, the tech company will have to prove that those steep investments will pay off with lasting positive results. That’s what long-term investors in Alphabet need to watch for in the years ahead.

Helpful Resources

• Full earnings release [opens PDF]
• Investor relations page