Adria Cimino, The Motley Fool
5 min read
Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) investors had reason to frown last week as the stock posted its worst trading day ever. The shares fell 13% in one session after certain key elements in the tech giant’s earnings report disappointed investors.
What happened? It all starts with artificial intelligence (AI). Alphabet is at the forefront of the AI movement, something that has led to soaring revenue quarter after quarter. But to make this happen, Alphabet had to greatly invest in an infrastructure build-out, and this spending isn’t over. Alphabet isn’t the only company in this situation; others operating in the cloud space also are investing hundreds of billions of dollars annually to get the job done. In fact, Alphabet, Amazon, Microsoft, and Meta Platforms aim to spend more than $700 billion this year alone on infrastructure expansion. Though these companies are generating growth from AI, investors worry it may not be enough given their spending levels.
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Considering the full picture, following Alphabet’s loss of $500 billion in market value in one trading session, you might approach AI stocks with a bit of hesitance. Should you really buy AI stocks now? Let’s find out.
Image source: Getty Images.
Alphabet’s biggest revenue driver
We’ll start by talking about the negative impact of this spending on Alphabet. You probably know this company best for Google Search, as it’s something many of us use daily. The Google platform is indeed the company’s biggest revenue driver — advertisers pay to promote across it, and that generates billions of dollars for Alphabet. In the recent quarter, Google ads accounted for 64% of the company’s total revenue.
But Alphabet also has a cloud computing business that’s growing in leaps and bounds, supercharged by demand for AI infrastructure and enterprise solutions. That business delivered a record 103% gain in revenue in the quarter to more than $30 billion. This is positive and offers investors reason to be optimistic, but as mentioned, to reach this level of growth, Alphabet poured investment into an infrastructure build-out.
As a result, capital spending has exploded higher, and this has hurt free cash flow — these two elements were the points of concern in the company’s earnings report. Alphabet kept its capex forecast for the year unchanged at $195 billion to $205 billion. As for free cash flow, it came in at negative $9 billion, missing analysts’ estimates of $2.7 billion.
