Alphabet shares fell sharply in mid-day Thursday trading ahead of the Google parent's first quarter report due after the closing bell, with analysts and investors focused on the tech giant's spending plans in the wake of a market-rattling update from AI rival Meta Platforms.
Meta (META) shares have fallen the most in more than two years and look set to lop around $170 billion from its market value after CEO Mark Zuckerberg warned that the social-media group's would transition from a "year of efficiency" to a "multiyear investment cycle" to power its AI ambitions.
Capital spending, Zuckerberg said, could rise to as high as $40 billion this year, with "significant" increases in 2025, as it looks to build "even more advanced models and the largest scale AI services in the world."
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Alphabet (GOOG) , for its part, issued a similar warning this year, telling investors that capital expenditures would be "notably larger than in 2023" and reporting a fourth-quarter tally of around $11 billion.
"The step up in capital spending in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers, and governments globally and the long-term growth opportunities that offers," said outgoing finance chief Ruth Porat.
Alphabet, however, has moved quickly to mitigate some of that investment effort with aggressive cost cuts, including head-count reductions, amid what she described in a company memo as a tremendous platform shift for the tech sector tied to the surge in AI advancements.
AI investments need to show returns
"These changes continue the work we've done over the past year to simplify our structure and improve velocity and execution," CEO Sundar Pichai followed in an April 18 blog post.
Monetizing some of that AI spending, then, will be crucial for Alphabet as it works to keeps investors onside following Meta's post-earnings collapse.
Analysts see ad revenue, perhaps the metric most acutely sensitive to the group's AI technologies, rising 10% from a year earlier to $60.1 billion, a modestly slower than the 11% growth rate recorded over the previous quarter.
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Jefferies analyst Brent Thill, however, cited advertising-segment momentum, infused by AI investments, as the basis for a $5 increase to his price target last week, which now stands at $180 per share with a 'hold' rating.
Wedbush analyst Scott Devitt, who carries an 'outperform' rating with a $175 price target on Alphabet, is also bullish on the ad sales story.
"We think the near-term setup for Alphabet is the most attractive within our digital advertising coverage," he said in a note published on April 12.
"The market hasn’t fully priced in the strength of the underlying demand environment for Google, (and) the perceived structural risk related to generative AI search (which we view as overdone) has kept some investors sidelined despite the near-term strength of the advertising business," he added.
Cloud revenue, meanwhile, is forecast to rise 25% to $9.32 billion, a sharp decline from the 20% pace seen over the three months ended in December.
AI investments need to show returns
Overall, Alphabet is expected to post a first-quarter revenue rise of 12.6% to $78.6 billion, with earnings up 29% to $1.51 a share.
"On the AI side, we like opportunities attached to cloud offerings, new enterprise AI tools, and AI integration on the Search/YouTube side," said CFRA analyst Angelo Zino," who on April 16 lifted his price target by $9 to $175 a share.
"We also see greater focus on efficiencies, with improving profitability across the cloud and smaller losses from Other Bets," he added.
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Zino, along with several other analysts, also sees the potential for Alphabet to introduce its first-ever dividend, following a similar move by Meta earlier this year, with share buybacks in the region of $70 billion.
Those moves would likely be supported by free-cash-flow generation of $75 billion and $80 billion over the next two years.
Alphabet shares were marked 2.3% lower in recent Thursday trading to change hands at $157.30, a move would trim their year-to-date gain to around 10%.
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