Google parent Alphabet (GOOG, GOOGL) kicked off Big Tech’s earnings season on Tuesday, giving Wall Street its first look at the quarter’s digital ad and cloud spending. The company reported better-than-expected profits and revenue, thanks to the strength of search advertising and continued cloud growth, but lagged YouTube ad sales.
Alphabet also continues to spend billions on building out its AI infrastructure. CFO Ruth Porat, who is transitioning to a new role as CIO, told analysts on the company’s earnings call that capital expenditures totaled $13 billion in the second quarter, up from $12 billion in Q1. And the vast majority of that is going to servers and data centers for AI capabilities.
The report sets the tone for the rest of the tech sector as it aims to update Wall Street on the latest developments not just in AI spending, but also in its actual returns.
Alphabet says it’s seen an uptick in cloud revenue so far, some of which comes from interest in AI products. But CEO Sundar Pichai dodged a more direct question about when analysts can expect to see returns on AI-related capital expenditures, saying the spending is necessary for a long-term bet like AI, adding that in situations like this, it’s better to overinvest than underinvest and get left behind.
UBS Global Research’s Stephen Ju wrote in an investor note after Google’s earnings presentation that it’s still not entirely clear when Google will reap the rewards of its AI investments.
“The advantages [Google] is to see in [Google Cloud Platform] about the productization of AI still seems hard to discern, as does the full payoff Google should see (we don’t think potential revenue benefits will materialize until [the first half of 2025] (at the earliest),” wrote Ju.
“As far as we are concerned, the [return on invested capital] The debate is only partially resolved, especially as we now consider what a higher [capital expenditure] “An estimate for 2025 and 2026,” he added.
Other analysts were more positive about Google’s AI efforts. For example, William Blair’s Ralph Schackart pointed to Pichai’s comment that some 2 billion users are using the Gemini AI model and that the company is building the model into its own products.
Wedbush analyst Scott Devitt pointed out in the firm’s report that Google’s AI search push is helping to drive better customer engagement and create more revenue opportunities.
Still, there’s one thing missing from all this: a definitive number showing how much Google’s AI investments are actually contributing to profitability. Pichai says the investments will make a difference, but when exactly is still pretty vague.
Alphabet is just the first of the big tech companies to report earnings this quarter, so you can almost guarantee investors will be looking for clues about how those other companies’ AI initiatives are paying off.
Microsoft (MSFT), Amazon (AMZN), Meta (META) and Apple (AAPL) are slapping AI features on their various products and services. Now we just have to wait and see if they provide more insight than Alphabet did.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him at X on @DanielHowley.
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