Investors bailed on Google LLC’s parent company Alphabet Inc. in late trading today after it posted fourth-quarter revenue that fell short of Wall Street’s expectations.

The company only just came in ahead of expectations on earnings too. It reported earnings before certain costs such as stock compensation of $2.15 per share, edging past the Street’s target of $2.13. It did well in terms of its bottom line, posting net income of $26.54 billion, up 28% from a year earlier.

But it was the revenue miss that really caused a stir, as Alphabet generated $96.47 billion in sales, up 12% from a year earlier but below the $96.56 billion analyst estimate. It’s notable that the company’s rate of revenue growth declined on an annual basis, having risen 13% in the same quarter one year ago.

Alphabet Chief Executive Sundar Pichai (pictured) insisted that the company delivered a “strong quarter” and said this was driven by its leadership in artificial intelligence and momentum across all of its key business segments.

“We are building, testing and launching products and models faster than ever, and making significant progress in compute and driving efficiencies,” he said. “Our AI-powered Google Cloud portfolio is seeing stronger customer demand, and YouTube continues to be the leader in streaming watchtime and podcasts. Together, Cloud and YouTube exited 2024 at an annual revenue run rate of $110 billion.”

In a conference call with analysts, Pichai caused a bit of a stir when he said that the company plans to increase its capital expenditure to $75 billion in fiscal 2025 as part of an effort to build out its AI infrastructure. That’s much more than the $58.84 billion that analysts were expecting the company to spend in the coming year.

For the first quarter, the company aims to spend between $16 billion and $18 billion on capital projects, which is greater than the $14.3 billion anticipated. “We are confident about the opportunities ahead, and to accelerate our progress, we expect to invest approximately $75 billion in capital expenditures in 2025,” Pichai added in defense of the spending.

Alphabet’s stock fell more than 7% in late-trading as investors digested what those numbers mean, and the drop suggests not everyone is convinced about the need to spend multiple billions of dollars on AI infrastructure. Though Alphabet and its rivals like Meta Platforms Inc. and Microsoft Corp. remain steadfast about the need to invest billions to build out their data centers for the next generation of AI, the rise of Chinese startup DeepSeek Ltd. and other low-cost open-source AI models suggests that such heavy investments may not be necessary. Last month, the markets were rocked when it became apparent that DeepSeek’s latest large language model could match the performance of advanced models such as OpenAI’s GPT-4o and Google’s Gemini, despite being built at a small fraction of the cost.

However, U.S. technology giants are insistent that such spending is necessary. Last week, Meta CEO Mark Zuckerberg brushed aside any concerns, saying he plans to invest between $60 billion and $65 billion on AI over the next year. Microsoft has committed to spending as much as $80 billion.

Alphabet’s finance chief Anat Ashkenazi told analysts on the call that the bulk of its $75 billion figure will go on “technical infrastructure,” including servers and data centers. That’s necessary to “support the growth of our business across Google Services, Google Cloud and Google DeepMind,” he added.

Investing.com analyst Jesse Cohen said the biggest problem for Alphabet is that its investors want assurances regarding how long it will take the company to make money from those multibillion-dollar investments, but it hasn’t been very forthcoming.

“The street is demanding clearer timelines on when AI spending translates to earnings and sales growth, not just promises,” he said. “The reaction underscores concerns that rivals like Microsoft, with its OpenAI partnership, are better positioned to convert AI hype into revenue.”

Google Cloud has been growing fast as the company strives to keep up with market leaders Amazon Web Services Inc. and Microsoft Azure, but investors were hoping to see it grow faster. Unfortunately, the cloud business unit had a disappointing quarter, with revenue rising 30%, to $11.96 billion, below the $12.19 billion analyst estimate.

One analyst asked Ashkenazi if the cloud revenue miss was the result of a lack of compute capacity, and he admitted that’s likely to be the case, saying the company saw strong demand for its AI products in the quarter, exiting the year with “more demand than we had available capacity.” However, he reassured analysts that the company is “working very hard to bring more capacity online.”

Cohen added that investors are also concerned about Google Cloud’s slower pace of growth, and want to know when its investments in AI are going to help boost that business. “For Alphabet to reassure investors, it needs to demonstrate that its AI bets, from Gemini models to Workspace integrations, can reignite Cloud momentum,” he said.

Indeed, investors are wary of ascribing too much impact to AI and some other products and services. “We do not subscribe additional value for Google’s custom chip or their Gemini AI assets,” Pivotal Research Group CEO and analyst Jeff Wlodarczak wrote in a note to clients today.

The Google Search business delivered total sales of $54.03 billion, up from $48.02 billion one year earlier. Within that segment, traffic acquisition costs came to $14.89 billion, below the $15.01 billion expected. “In Search, advances like AI Overviews and Circle to Search are increasing user engagement,” Pichai told analysts.

The company reported total advertising revenue of $72.46 billion, rising from $65.52 billion in the year-ago period. Within that segment, YouTube ad revenue came to $10.47 billion.

Holger Mueller of Constellation Research Inc. said the fact that Alphabet’s advertising revenue appears to be outperforming its cloud revenue must have been a bit of a shock for some investors. However, it’s a promising development, he said, as it suggests that competitors like Microsoft have been unable to disrupt its dominant position in internet search with their generative AI models.

“Even so, Sundar Pichai and his team know AI is still key, and they are doubling down on their investments in it with a record $75 billion commitment,” Mueller said. “Despite all of this investment, Alphabet managed to increase its earnings per share by 40%, which is impressive. The question for Alphabet now is how can it get Google Cloud to accelerate growth again, and no doubt the answer lies in solving its capacity limitations.”

Elsewhere, the Other Bets segment, which includes the self-driving car business Waymo and the life sciences unit Verily, delivered revenue of $400 million in the quarter, down 39% and some way off the Street’s $614.6 million target.

During the quarter, Waymo made a number of promising announcements, saying that its robotaxi service now operates in Los Angeles, Phoenix and San Francisco, where it covers more than 500 square miles of public roads. In December, it revealed plans to expand on this by launching new commercial services in Austin, Texas, Miami and Atlanta in the coming year. It will also start testing the robotaxi service in Tokyo, the first time it has expanded its self-driving cars globally.

Photo: Alphabet