Alphabet Inc. Faces Challenges Amid Growth in AI and Cloud Investments
Alphabet GOOGL shares have produced a 26.4% return over the past year, outperforming both the Zacks Computer & Technology sector and the Zacks Internet Services industry, which delivered 20.7% and 23.7% returns, respectively.
Despite this, GOOGL shares dropped over 9% following its fourth-quarter 2024 earnings report, indicating concerns over slowing Google Cloud revenue. In the reported quarter, Google Cloud revenues rose by 30.1% year over year to $11.955 billion, representing 12.4% of the company’s total revenue for that period. However, this figure missed the Zacks Consensus Estimate by 1.51%.
As Alphabet concluded 2024, it maintained an annual run rate of $110 billion for its Cloud and YouTube segments. The company plans to invest about $75 billion in capital expenditures in 2025, focusing on technical infrastructure improvements, primarily servers, data centers, and networking.
This strategic investment aims to bolster Alphabet’s competitiveness against rivals like Microsoft MSFT and Amazon AMZN in the cloud computing arena.
However, Alphabet currently faces challenges due to a lack of capacity. Until new capacity is operational in 2025, cloud revenues are likely to experience increased variability, which could weigh on investor sentiment and stock performance.
Performance Overview of GOOGL Stock
Image Source: Zacks Investment Research
AI Developments: A Boost for GOOGL’s Future?
Alphabet is intensifying its focus on Artificial Intelligence (AI) as a means of attracting new customers, securing larger contracts, and enhancing product usage among existing clients.
Currently, GOOGL’s Gemini models, alongside Generative AI (Gen AI) capabilities for video and image generation, are utilized by over 4.4 billion developers across various platforms.
Alphabet has been rapidly expanding its AI capabilities, recently unveiling Gemini 2.0, its most advanced model designed specifically for AI agents.
The launch included Gemini 2.0 Flash, which offers low latency and improved performance. Earlier this year, updates were made to 2.0 Flash in Google AI Studio, with a more recent distribution to all Gemini app users on desktop and mobile. The updated version is also now generally available via the Gemini API in Google AI Studio and Vertex AI.
How AI is Transforming Alphabet’s Search and Cloud Operations
Alphabet’s AI-enabled products are currently being used by over 2 billion users. The use of AI in Search has improved efficiency, with Gemini facilitating AI overviews. The Circle to Search feature is gaining traction among younger users.
Vertex AI, the company’s AI developer platform, is rapidly expanding, experiencing a fivefold increase in customers year-over-year in the fourth quarter of 2024. Its usage has surged 20 times throughout the year, driven by strong developer interest in tools like Gemini Flash, Gemini 2.0, Imagen 3, and Veo.
There has also been notable demand for Trillium, Alphabet’s sixth-generation TPU, which offers four times better training performance and three times greater inference than its predecessor. In collaboration with NVIDIA NVDA, GOOGL successfully delivered H200-based platforms to clients, and they were the first to announce a customer operating on NVIDIA’s Blackwell platform.
Earnings Estimates Show Some Downward Pressure for GOOGL
The Zacks Consensus Estimate for GOOGL’s first-quarter 2025 earnings stands at $2.02 per share, which is down by a penny but indicates a year-over-year growth of 6.88%.
The consensus for earnings in 2025 is estimated at $8.90 per share, reflecting a 3-cent decrease over the past month, which implies a year-over-year growth of 10.7%.
Alphabet Inc. Price and Consensus Chart
Alphabet Inc. price-consensus-chart | Alphabet Inc. Quote
Alphabet’s earnings have surpassed the Zacks Consensus Estimate each of the four quarters prior, with an average earnings surprise of 11.57%.
Is GOOGL Stock Overvalued?
Currently, Alphabet holds a Value Score of C, indicating that the stock may be overvalued. The stock is trading at a forward 12-month Price/Sales ratio of 6.83X, above the industry standard of 5.56X.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
GOOGL shares are trading below the 50-day moving average, but above the 200-day moving average, indicating a mixed trend.
Image Source: Zacks Investment Research
What’s Next for GOOGL Stock: Buy, Sell, or Hold?
GOOGL’s advancements in GenAI and substantial investments in cloud computing may become significant growth drivers, even amid tough competition and regulatory challenges. Alphabet retains a strong position in the search engine market and cloud sector, which could provide long-term support for the company.
However, the company is currently navigating increased regulatory scrutiny regarding its search dominance, particularly allegations of using Android to unfairly promote its own search engine. Several lawsuits related to data privacy, competition, AI usage, and copyright practices are also complicating its position globally.
Alphabet currently has a Zacks Rank of #3 (Hold), suggesting that investors might consider waiting for a better opportunity to purchase stock.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
