Investors Lose Patience with AI Spending! Alphabet Takes First Hit, Microsoft and Amazon May Follow

Alphabet (GOOGL-US) was expected to receive praise from investors for its second-quarter earnings, as Google Cloud revenue growth significantly exceeded market expectations, briefly pushing the stock higher in after-hours trading. However, the stock quickly reversed course and dropped as much as 4.6% after management revealed that capital expenditures would continue to rise next year.

A Bloomberg column noted that Alphabet's experience serves as a warning to other major cloud providers about to report earnings: even with strong performance, announcing continued expansion of artificial intelligence (AI) spending could trigger investor backlash.

Alphabet is seen as a key bellwether for this quarter’s tech earnings, given its involvement across multiple segments of the AI supply chain, including developing advanced models, providing cloud services and AI hardware, and integrating AI features into consumer products like Google Maps, which has over 1 billion users. Alphabet reported that the Gemini application now has approximately 950 million monthly active users.

The biggest highlight of the earnings report came from Google Cloud, which saw revenue grow 82% year-over-year in Q2—far exceeding Wall Street’s forecast of 72%. The backlog of future cloud service revenues also rose 12% year-over-year. This performance not only indicates that Google’s investments in data centers and custom AI chips are beginning to pay off, but also offers an optimistic signal for Microsoft and Amazon’s upcoming cloud results.

This robust cloud growth even allowed investors to temporarily overlook the fact that Google Search and other revenues fell $13 million short of the market’s $63.28 billion estimate. In Q4 2023, this segment had also slightly missed expectations, triggering a 6.5% drop in Alphabet’s stock amid concerns that AI was eroding its core search business.

Now, through features like AI Overviews and AI Mode, Google is gradually convincing investors that its search business can adapt to the AI wave. Management stated that users are asking more specific and detailed questions via AI, creating new opportunities for delivering more relevant ads.

Nevertheless, Alphabet still faces criticism over the high cost of its AI investments. The company raised its annual capital expenditure forecast from $180–190 billion to $195–205 billion, with funds allocated to expanding its own computing capacity and building data centers for enterprise clients.

Bloomberg argues that Alphabet’s sell-off—despite its fast-growing cloud business—signals that Microsoft (MSFT-US), Amazon (AMZN-US), and other large tech firms may face tough scrutiny when they report earnings. If their results are not as strong as Alphabet’s but they still announce higher AI spending, the market reaction could be even more severe.