Google parent Alphabet (GOOG, GOOGL) kicked off Big Tech’s earnings season on Tuesday, giving Wall Street its first look at digital ad and cloud spending in the quarter. The company reported better-than-expected earnings and revenue on the strength of Search ads and continued cloud growth, but fell short on YouTube ad sales.
Alphabet also continues to spend billions building out its AI infrastructure. CFO Ruth Porat, who is transitioning to a new role as chief investment officer, told analysts during the company’s earnings call that capital expenditures in the second quarter topped out at $13 billion, up from $12 billion in Q1. And the vast majority of that is going toward servers and data centers for AI capabilities.
The report sets the tone for the rest of the tech industry as it prepares to provide Wall Street with the latest on not just AI spending, but also how much that spending is paying off in actual revenue.
So far, Alphabet says it’s seeing an uptick in cloud revenue, with some of that coming from interest in AI products. But CEO Sundar Pichai sidestepped a more direct question about when analysts can expect to start seeing a return on capital investments related to AI, saying that the spending is necessary for a long-term bet like AI and adding that in situations like this it’s better to overinvest rather than underinvest and fall behind.
UBS Global Research’s Stephen Ju wrote in an investor note following Google’s earnings call that it still isn’t entirely clear when Google will start to reap the benefits of its AI investments.
“The benefits [Google] is seeing in [Google Cloud Platform] on AI productization still seems difficult to discern, as is the full payoff that Google should see (we do not think potential revenue benefits will arrive until [the first half of 2025] at the earliest),” Ju wrote.
“So as far as we are concerned, the [return on invested capital] debate remains only partially resolved, especially as we are now contemplating what is a higher [capital expenditure] estimate for 2025 and 2026,” he added.
Other analysts were more upbeat on Google’s AI efforts, with William Blair’s Ralph Schackart pointing to Pichai’s comment that some 2 billion users are accessing its Gemini AI model and that the company is building the model into its own products.
Wedbush analyst Scott Devitt, meanwhile, pointed to Google’s AI Overview for search helping to drive better customer engagement and creating more monetization opportunities as a positive in the company’s report.
Still, the one thing missing from all of this is a definitive number pointing to how much Google’s AI investments are actually helping its bottom line. Pichai says investments will make a difference, but when exactly is still rather vague.
Alphabet is just the first of the Big Tech names set to report their earnings this quarter, and you can all but guarantee investors will be searching for clues as to how those other companies’ AI moves are paying off as well.
Microsoft (MSFT), Amazon (AMZN), Meta (META), and Apple (AAPL) are slapping AI features onto their various products and services. Now we just have to see if they’ll give any more insight than Alphabet had to offer.
Email Daniel Howley at [email protected]. Follow him on X at @DanielHowley.
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