Alphabet stock falls on disappointing cloud growth, China probe

Key points

• Alphabet stock was down on Wednesday after revenue fell short of estimates.

• The company's cloud computing revenue saw slower growth than the previous quarter.

• Is Alphabet stock a buy?

The company fell short of revenue estimates.

Alphabet (NASDAQ: GOOG) stock was down some 8.5% Wednesday after the social media and cloud computing provider had mixed results in its fiscal fourth quarter and became the subject of another investigation.

Overall, the tech giant missed revenue estimates but topped earnings estimates for the quarter. Alphabet, the parent of Google and YouTube, saw revenue rise by 12% year over year to $96.5 billion. That was short of the $96.6 billion estimate among analysts.

Net income rose 28% to $26.5 billion, or $2.15 per share. This bested estimates of $2.13 per share.

Aside from the mixed results, Alphabet also learned that it was the subject of an antitrust investigation by China. Chinese officials made the announcement shortly after the Trump Administration imposed a 10% tariff on Chinese imports. The topic did not come up in the earnings call with analysts.

This follows an antitrust ruling last fall by the U.S. Department of Justice that found Alphabet violated antitrust laws by creating a monopoly with its Google search engine. The DOJ suggested several remedies, including making it sell off its Chrome search engine. Alphabet said it would appeal the ruling.

For now, investors seem more concerned with the mixed Q4 results.  

Cloud revenue misses estimates

Alphabet had solid growth in the quarter, but some key areas were slightly decelerated from the previous quarter.

Google Services, which includes Google and YouTube advertising and subscriptions, rose 10% in the quarter to $84.1 billion, while it grew about 13% in Q3, year over year. Google Search, which includes Google ads, climbed 12% to $54 billion, about the same as last quarter.

Further, operating income within Google Services rose about 23% to $32.8 billion, but that was slower than the 29% growth rate the previous quarter.

But the larger concern seemed to be Google cloud revenue. It grew 30% to about $12.0 billion, but it missed estimates of $12.2 billion in revenue. It was also slower growth than the previous quarter, where cloud revenue gained 35%. Operating income of $2.1 billion also had a slower growth rate than the previous quarter.

Should this be a major concern among investors? Probably not enough to warrant the 8.5% selloff on Wednesday.

Pouring money into AI

Alphabet did not offer any revenue or earnings guidance, but it did lay out big plans for capital expenditures in 2025.

The firm plans to spend $75 billion in capex in 2025, with about $16 billion to $18 billion of that coming in Q1. This figure is much higher than the $58.8 billion that analysts had anticipated.

Alphabet CFO Anat Ashkenazi said the majority of that will go toward technical infrastructure, which includes servers and data centers.

“We’re delivering products and solutions to customer at a rapid pace, building, testing, and launching products faster than ever before,” Ashkenazi said on the earnings call. “And as I mentioned on the Q3 call, we’re doing that while also focusing on driving further efficiencies in how we operate the business.”

The DeepSeek threat?

It’s not clear if the increased capex spending is in response to the potential threat of DeepSeek and its AI model. But Alphabet CEO Sundar Pichai responded to a question about what the emergence of DeepSeek means for Alphabet.

Pichai said “they’ve done very, very good work” but touted Alphabet’s own models.

“There’s frontier model development, but you can drive a lot of efficiency to serve these models really, really well. And if you look at one of the areas in which the Gemini model shines is the Pareto frontier of cost performance in latency. And if you look at all three attributes, I think we are — we lead this period of frontier,” he said. “And I would say both our 2.0 Flash models, our 2.0 Flash thinking models, they are some of the most efficient models out there, including comparing to DeepSeek’s V3 and R1.”

The selloff on Wednesday seems a bit overblown, although don’t expect huge returns from Alphabet stock in the near-term as it ramps up its AI spending.

Analysts give it a median price target of $210, which is about a 9% gain. Plus, its relatively cheapo with a P/E of 25. I still like Alphabet as a buy.