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When Alphabets (NASDAQ:GOOG) reported its Q4 earnings on Wednesday (February 4) and the stock went down, up, and down again. The results were good, but that’s not the real story.
The company has revealed plans to expand its use of artificial intelligence (AI) to greater levels by 2026. But what does that mean for the company and the broader stock market?
Outstanding works
Advertising revenue was up 14% and cloud sales were up 48%. And operating income growth was impressive, coming in at 22% and 154%, respectively.
Investors have often wondered whether the shift to AI search could threaten Google’s search status. But the Gemini app has reached 750m monthly active users, so that answers the question for now.
Everything seems to be going well, but the real number that investors were looking at was the planned cost of 2026. And CEO Sundar Pichai is targeting somewhere between $175bn and $185bn.
It’s a big number that means a lot to the company and its shareholders. But there are also implications for the broader stock market.
$175bn
In context, $175bn is more than that Meta Platforms expects ($115bn-$135bn) to spend this year. And it’s more than double Alphabet’s free cash flow by 2025 ($73bn).
And it’s more money than the company has on its balance sheet. So I suspect the company will have to fund its spending by taking on debt.
There’s nothing wrong with that – it’s probably the right decision if it can get a good return on that investment. But it’s risky, especially given the uncertainty about the benefits of AI.
Google Cloud has done well, but there are real questions about where the profits will come from the likes of OpenAI and Anthropic. And that makes investing at this rate very risky.
What does it mean for the stock market
Alphabet’s big commitment has serious implications for the broader stock market. It’s a good sign for companies that make equipment that goes into data centers.
Given where those stocks are currently valued, capital spending cuts could cause the stock price to fall. But demand looks set to remain strong – at least for another year.
On the other side of the coin, it won’t be good news for software companies that have been under pressure lately. The alphabet is a clear sign of many AI applications on the way.
The reduction in data center costs is likely to disrupt the competition that has been threatening the big names in the industry. But there are no signs of the pressure easing.
Silly last thoughts
My opinion is that investors can consider buying the stock at today’s prices. If the AI story continues to develop positively, the company should more than justify its current share price.
But I also think it’s worth looking at some software stocks that have been beaten down to help offset the risk. If – for whatever reason – things go wrong, these businesses will benefit.
There is still a lot of uncertainty about what AI will achieve. But I think investors can look smart by playing both sides – and Alphabet is a good stock to consider as part of this strategy.
