Alphabet tanks as analysts admit results were mixed, leaving many questions

Results from Google owner Alphabet Inc (NASDAQ:GOOG) sent the shares down over 8% on Wednesday, though analysts highlighted there were many moving parts that made appraisal hard. 

Investors seemed perturbed that the Cloud segment delivered revenue growth below expectations, offsetting the earnings beat.

Analysts at Jefferies highlighted that Search ads beat Wall Street forecasts by 1% and YouTube ads beat by 2%, but Cloud missed the Street by 2%, decelerating to 30% growth from 35% in the third quarter, though still above the 28-29% in the first half.

UBS pointed out that Google offered capital expenditure guidance for 2025 was $15 billion ahead of investor expectations at $75 billion, up around 43% on the prior year and following a 63% increase in 2024.

"As our 2025 revenue forecast is essentially unchanged [compared to before the results], investors will be asking what new products will be emerging to warrant the higher level of investment," the UBS analysts wrote, suggesting it may be to address a shortfall on the Cloud arm's Google Cloud Platform (GCP) suite as it was hit by supply constraints in the past quarter.

"With that in mind, it is still unclear to us whether Google will be able to extract increased monetization from AI Overviews (versus current search engine results pages) or how quickly supply constraints in GCP will be alleviated, so for the time being we alongside investors will need to wait for sharper product development/release signals to materialize."

The higher capex corresponded to a 1% decrease to Google's EPS forecasts and led the Swiss bank to cut its price target by $2 to $209.

"Looking out, we maintain our 'neutral' rating as we continue to believe that Google's P/E trading multiple will remain under pressure due to unresolved regulatory issues and prospects for market share loss in its most important franchise."

Broker Wedbush said the results were "mixed", with revenue slightly below expectations while operating income was ahead of consensus.

"Importantly, advertising trends have remained healthy exiting the year, with Google Search revenue growth of +12.5% exceeding the Street's +11.0% Y/Y estimate by ~150bps, while YouTube Ads revenue growth of +13.8% Y/Y beat consensus (+11.2% Y/Y) by ~260bps."

While this was offset by the slower growth in the Cloud business, it was a second quarter of revenue growth of 30%.

"That said, management commentary was positive and indicated that demand outpaced available capacity in the quarter," Wedbush analysts said, noting that the higher capex in 2025 is "to support continued adoption and growth across AI infrastructure, genAI solutions, and core GCP products".

"The more aggressive pace of investment should alleviate capacity constraints as AI demand continues to scale.

"Google has made meaningful progress across its AI investments in its core enterprise and consumer products," they said, pointing out that AI Overviews "continue to drive higher search usage".

The Jefferies analysts said that while Cloud revenue growth decelerated "back to prior trend" after a strong Q3, "we see potential for future upside given current capacity constraints and plans for FY25 capex up 43%".

But they noted that Q1 of 2025 is to "start slow" given FX headwinds and tougher comparatives from last year.

Also, they flagged that management stated on the call that "once again, GCP grew at a rate that was much higher than Cloud overall", with margins also expanded.