Alphabet’s strong quarter eases fears about the search giant’s sky-high spending
Alphabet reported fantastic fourth-quarter results on Wednesday, proof that its eye-popping spending on artificial intelligence is accelerating growth across all its businesses. Revenue in the fourth quarter ended Dec. 31 increased 18% to $113.83 billion, well ahead of the $111.43 billion expected, according to LSEG. Earnings per share (EPS) increased 31% year over year to $2.82, also breezing past estimates of $2.63, according to LSEG. GOOGL 1Y mountain Alphabet 1-year return Bottom line Alphabet posted beats in its search, network, and cloud businesses, more than offsetting a slight underperformance in YouTube ads and subscriptions, platforms, and devices. The only other blemish was a lighter operating margin, resulting in a miss on operating income. Cash flow results were superb. However, investors were most focused on management spending guidance for the current year. Capital expenditures are forecast to range from $175 billion to $185 billion, well above the Street’s estimate of $115 billion and roughly double the $91 billion spent in 2025. Much of that spending will go toward its artificial intelligence buildout, which is why we see its suppliers Broadcom and Nvidia trading higher in the aftermarket. More capex from the hyperscalers means more revenue for the semiconductor and AI hardware companies. Management said that about 60% of 2025 capex went toward machine line servers, with the remaining 40% going to longer-duration assets, including data centers (including the physical building) and networking equipment. The team expects a similar ratio for 2026 capex. The Street is taking this jaw-dropping jump in spending in stride. Though the stock initially sold off on the print, it’s clear that all this spending is driving significant growth and will continue to do so. We saw a similar dynamic when Meta reported last week: The social media giant’s guidance offset worries about its sky-high spending on artificial intelligence. What’s increasingly clear is that the Street has an issue not with the absolute level of spending, but with the expected return. While that was a bit less certain this time last year, Alphabet is now showing that the spending is paying off. Not only did sales in search and cloud outpace expectations, but growth for both key segments also accelerated sequentially. “We’re seeing our AI investments and infrastructure drive revenue and growth across the board,” CEO Sundar Pichai said in the release. Another concern specific to Alphabet was that adopting AI would cannibalize its Search revenue. That is not the case. Instead, even with its Gemini app now seeing more than 750 million monthly active users (MAUs), 100 million more than last quarter, and Gemini, the company’s large language model, processing over 10 billion tokens per minute, Search usage broke a quarterly record. Clearly, AI is a tailwind driving even more traffic to Google Search. On the post-earnings call with investors, Pichai also noted a “sharp increase” in engagement on the Gemini app. “So all the metrics, be it active usage, the intensity of usage, retention, all showed distinct progress across iOS, web, Android, etc., and geographically, globally,” he said. We’ve beaten ourselves up over exiting Alphabet last March. At the time, we were worried that the search business was in trouble and that the Department of Justice was pushing for a breakup of the company. Both fears proved unfounded, which is why we reinitiated our position in December. We can’t let a bad call cloud our thinking. We’re happy we got back in for this exceptional quarter. The eye-popping spending on AI is justified, given the accelerated growth in its most consequential businesses. As a result, we are reiterating our 1 rating on Alphabet shares and are reviewing our price target. (Jim Cramer’s Charitable Trust is long GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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