Aditya Soni and Khushi Singh
(Reuters) – Alphabet Inc shares fell more than 3 percent on Wednesday on concerns that its expanding investment in artificial intelligence infrastructure is squeezing profit margins and that YouTube faces tougher competition for advertising revenue.
Capital expenditures at Google’s parent company rose to a better-than-expected $13.2 billion in the second quarter as the company invests heavily in infrastructure needed to support its generative AI services and compete with Microsoft.
Alphabet is cutting costs through job cuts to ensure profitability, but analysts say a seasonal increase in new hires and an earlier-than-usual launch of the Pixel will weigh on third-quarter margins.
The company’s YouTube video streaming service has also struggled with tough year-over-year comparisons and competition in the online advertising video market from the likes of Amazon.com.
YouTube’s ad revenue grew 13% in the second quarter and about 21% in the first quarter.
“Management has been fairly conservative in its outlook for the rest of the year,” Bernstein analysts said.
“Perhaps this is Google’s way of setting an easy bar for its new CFO for the coming quarter. Or maybe there is some truth to the conservatism and slowing growth and rising costs make this an uncomfortable time for digital advertising companies.”
Shares of other digital ad-dependent companies, including Meta Platforms, Snap and Pinterest, fell 3.2% to 4% as growth slowed even as Alphabet’s core search business beat expectations.
Alphabet Inc. was on track to lose about $60 billion in market value on Wednesday after its shares rose about 30% so far this year, benefiting from a rally in AI stocks.
Despite the declines, many analysts remained positive on Alphabet, pointing to signs that the company’s AI efforts are boosting cloud revenue and that there was little disruption to search revenue from its broadly rolled-out AI overview earlier this year.
Revenue from cloud computing services rose 28.8%, beating expectations, a positive sign for business spending.
“We continue to see Google as a winner in AI and are encouraged by improvements to its core product,” analysts at Piper Sandler said.
At least 25 brokerages raised their price targets on the stock, with the median price rising to $204. Alphabet trades for 22.2 times 12-month forward earnings, well above AI chip company Nvidia’s 38.6 times, according to LSEG data.
(Reporting by Aditya Soni and Khushi Singh in Bengaluru; Editing by Shaunak Dasgupta)