Investing.com - Shares of Google-parent Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) plunged Wednesday after it outlined plans to increase capital expenditures this year by far more than Wall Street analysts had expected, while its cloud unit revenue disappointed Wall Street estimates, exacerbating investor fears around profitability.
By 3:40 PM ET, Alphabet's stock was down by 7.9% to $190.01.
Alphabet said it expects capital spending to amount to $75 billion in 2025, well above the $58 billion penciled in by analysts and $52.5 billion last year. Concerns have swirled around heavy AI spending by Big Tech names like Alphabet, especially in the wake of the emergence of a low-cost AI model from Chinese start-up DeepSeek last week.
DeepSeek's claim that its model delivered comparable performance to OpenAI's ChatGPT with less-advanced chips and at a fraction of the cost has been met with widespread skepticism but has still sparked questions around both the necessity -- and eventual profitability -- of massive AI spending. Alphabet plans to spend between $16 billion to $18 billion in the first quarter, far above the $6 million DeepSeek said it spent on building its AI model.
Alphabet CEO Sundar Pichai said DeepSeek's team had done "very, very good work", but noted that Google's Gemini AI models are similar in efficiency.
In a post-earnings call with analysts, Pichai moved to defend the jump in Alphabet's spending on AI, arguing that the cost of the technology is going to "keep coming down" and will make "more use cases feasible".
"[The opportunity space] is as big as it comes, and that's why you're seeing us invest to meet that moment," Pichai said.
Developing its AI capabilities and folding these offerings into its operations like search and cloud computing has been a central focus of Alphabet's capital spending strategy. Still, investors have flagged worries around Alphabet's returns, particularly an easing in sales growth at the cloud business.
For the three months ended on December 31, revenue at the division expanded by 30% to $11.96 billion, slowing from an uptick of 35% in the prior quarter. Analysts were anticipating a rise of 32.3% to $12.16 billion, according to LSEG data cited by Reuters.
Overall, Wall Street analysts lowered their ratings on the internet giant but maintained an overall positive view. They highlighted the cloud revenue shortfall was due to capacity constraints, which means the company could see a revenue catch-up later this year.
KeyBanc analyst Justin Patterson lowered his price target to $220 from $225 while maintaining an Overweight rating. "[P]ositively, [the cloud unit] is seeing demand for its AI-powered cloud solutions. Negatively, this has created a supply-demand imbalance," analysts at KeyBanc said in a note to clients. "While we view this as a solvable problem, it also suggests share gains may be dictated by the pace at which Cloud could add capacity. That strikes us as a tough position."
Elsewhere, Mizuho (NYSE:MFG) analyst James Lee cut his price target to $230 from $235 while maintaining an Ouperform rating. Lee highlighted that the increased capex investments should be positive long-term, suggesting management is confident in AI and the cost advantage of custom ASICs.
For the fourth quarter, Alphabet posted revenue of $96.47 billion and earnings per share of $2.15. Wall Street estimates had seen the figures at $96.69 billion and $2.12, respectively.
(Scott Kanowsky, Yasin Ebrahim contributed reporting.)