(Reuters) – Alphabet shares dropped about 7% in premarket trading on Wednesday as investors were disappointed by the company’s slowing cloud growth and concerned about its hefty investment to build artificial intelligence (AI) infrastructure.
Alphabet has been heavily investing in infrastructure to enhance AI research and integrate it into products like search and cloud services. But its plan to pump in $75 billion towards these efforts this year was 29% higher than Wall Street’s expectation of about $58 billion, according to LSEG data.
“This is a significant increase, and it shows that Alphabet is throwing the kitchen sink at its AI plans,” said Kathleen Brooks, research director at trading platform XTB.
The recent emergence of China’s low-cost DeepSeek AI model, which is said to be on par or better than U.S. industry-leading models at a lower cost, has led to more pointed questions about the need for Big Tech to spend billions of dollars.
Last week, Microsoft and Meta Platforms executives defended their hefty AI spending plans, saying they were crucial to staying ahead in the new field.
Google’s revenue from its cloud business increased 30% to $11.96 billion in the fourth quarter, less than the 35% in the third quarter. It was also slower than bigger rival Microsoft’s 31% jump in the quarter, but more than the 19% increase that cloud market-leader Amazon is expected to post.
Still, despite edging out Google, Microsoft’s Azure cloud platform’s growth was smaller than expected. Microsoft’s shares were off 0.4% in premarket trading, while Amazon, which is set to report results on Thursday, dropped 1.7%.
“The AI story remains strong, with surging demand for cloud-based AI training and solid growth in Gemini. This is good news not just for Alphabet’s cloud business but the broader AI market at large,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.
Alphabet’s ad business is grappling with fierce competition as advertisers increasingly flock to dynamic social media platforms such as Meta’s Facebook and Instagram, and ByteDance’s TikTok.
At least four brokerages cut their price target on Alphabet’s stock, bringing the median target to $220, according to LSEG data.
That compares with the stock’s price of $191.20 in premarket trading.
Alphabet’s share price had risen 9% this year through Tuesday, slightly more than Amazon’s 10.3% increase, while Microsoft has dropped 2.2%.
Still, Alphabet’s shares are the cheapest of the trio, with a 12-month forward price-to-earnings ratio of 22.7. Amazon’s is nearly 39 and Microsoft’s is 29.
(Reporting by Joel Jose in Bengaluru and Alun John in London; Editing by Amanda Cooper and Savio D’Souza)
