Google-parent Alphabet announced better-than-expected earnings for the second quarter of FY27, but its shares dropped 7% as the tech giant's plan to further increase its massive AI spending goals may have spooked investors.
Alphabet now expects to spend between $195 billion and $205 billion in capital expenditures, following which the stock tumbled in extended trading after trading mostly flat during the session. Last quarter, it had said that it planned to spend between $180 billion and $190 billion this year.
"We have increased our capacity quite significantly over the past three years. The demand still outpaces that investment," its finance chief Anat Ashkenazi said on a conference call with analysts, justifying the increased spending plans. She added that faster-than-expected delivery of capacity contributed to the hike.
Alphabet Q2 earnings
This came while Google Cloud’s revenue jumped 82% to $24.8 billion during the June quarter, driven by strong demand from AI-hungry enterprises worldwide. This is higher than the 64% increase expected by analysts on average, Reuters quoted data compiled by LSEG.
Google’s advertising revenue stood at $81.6 billion in Q1, higher than estimates of $81.1 billion. Total revenue meanwhile also beat estimates at $119.8 billion. Adjusted profit per share of $2.85, however, fell slightly short of Wall Street expectations of $2.89. The company also reported negative free cash flow for the first time in its history, burning $5.9 billion this quarter.
Sundar Pichai says Google is not losing ground in AI race
Alphabet CEO Sundar Pichai pushed back concerns that the company is falling behind rivals in the AI race, after delaying a flagship model and ceding some ground in AI coding. This came as investor worries increased after Google delayed the release of Gemini 3.5 Pro, a model which was originally scheduled to be launched in June and was expected to bolster the company's standing in AI coding and autonomous "agent" tasks.
"We have had clearly frontier models. There are many attributes on which we are still at the frontier; there are areas where we've acknowledged we need to improve and coding and agentic coding is an example of that," he said in response to a question during an earnings call on whether Gemini could remain competitive at the industry's leading edge.
Also Read | Sundar Pichai pushes back on claims Google is losing ground in AI race
Massive AI spending increase worries
While Google’s management continues to clear investor worries around it falling behind peers in the AI race, some analysts question whether the massive AI spending will actually bear fruit in the future.
Legendary investor Warren Buffett recently acknowledged that he “made a mistake” by not investing in Alphabet sooner, although it was not among his favourites. “I would say that I don’t like it as well as at least four or five other businesses that we own. The real question with Google and all of its competitors now, because they are all laying out hundreds of billions, and that is real money. That is the game they are playing now. They weren’t playing that game with computer software,” he told CNBC in a recent interview.
He often explained why he avoided buying tech stocks, as he did not really understand how they were making money - a decision that he later said cost a lot of money for Berkshire investors.
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Earlier this year, billionaire investor Ray Dalio said the booming artificial-intelligence market shows signs of a bubble that will eventually burst. “All great technology changes produce bubbles. Nobody can get it exactly right. You have to either spend a ton of money to capture your market share and not worry about whether it’s too much or not, or you don’t spend enough money and you lose your market share,” Dalio, the founder of Bridgewater Associates, said during a Bloomberg Television interview.
(With inputs from agencies)
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