Alphabet's second-quarter report looked like a win on paper. Google Cloud was the standout, with revenue hitting $24.77 billion - up from $13.6 billion a year ago - and advertising revenue of $81.63 billion edged past forecasts.
But the stock dropped more than 2% after the earnings came out. The reason? Alphabet announced it now expects to spend between $195 billion and $205 billion on capital expenses this year. That is a big jump from the previous range of $180 billion to $190 billion, and it easily beat analysts' average estimate of $186.4 billion.
Lately, investors have been stepping away from AI wagers, grappling with the huge outlays required for data centers and semiconductors to support the technology. Alphabet's raised spending plan only added to those worries, sending the stock lower even though the underlying business looked strong.
CEO Sundar Pichai called it an "amazing quarter" and pointed to demand for AI infrastructure as the driver.
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Over the last quarter, Alphabet shares have gained about 4%, although they remain below the year's peak. Amazon shares have remained nearly unchanged in the past quarter, Meta fell roughly 6%, and Microsoft dropped 5%.
The capital expenditure boost underscores the competitive landscape in AI, where Alphabet is racing against Microsoft and Amazon to build out compute capacity. Google's cloud business, while smaller than its rivals, is growing faster, and the company's custom chip efforts aim to increase efficiency when running Gemini, cutting processing time. This strategic push, however, comes with near-term profit pressure that investors are watching closely.
The market's reaction highlights a growing tension between strong operational results and the heavy investment required to maintain leadership in AI. Alphabet's rising capital expenditure mirrors similar moves by Microsoft and Amazon, all of which are funneling billions into data centers and custom chips. Investors are weighing whether these outlays will pay off in future revenue growth or squeeze margins. Alphabet's cloud segment, though still behind its competitors, is gaining ground rapidly, and the company's custom chip development (like the reported Frozen v2 processor) aims to reduce reliance on external suppliers, potentially improving long-term profitability.
The heavy spending on infrastructure is not unique to Alphabet. Microsoft and Amazon have each announced massive capital budgets this year, all three tech giants betting that early leadership in AI compute will translate into long-term market share. Alphabet's growing investment in custom silicon, such as the Frozen v2 chip reportedly designed to improve Gemini performance, could help differentiate its cloud offering and lower costs over time.
At the same time, the company denied a report that it delayed its Gemini 3.5 Pro model. "We're shipping quickly across a wide range of models while keeping them highly cost-effective for customers," a spokesperson told Yahoo Finance. "We're currently testing 3.5 Pro, an upgraded Flash model, and other models with partners, and we're productively engaged with the US government."
The company is reportedly building a processor called Frozen v2 designed to improve performance for Gemini, per The Information.
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