Alphabet Capex Expands to $85 Billion, Raising Concerns; Citi Reaffirms 'Buy'

TradingKey - On Wednesday, Alphabet, Google's parent company, reported its Q2 earnings, surpassing expectations for both revenue and profits. However, the company announced that its capital expenditures for 2025 will increase from the previously forecasted $75 billion to $85 billion. After the announcement, the stock initially dipped 3% in after-hours trading but later rebounded to gain more than 2%.

Analysts suggest that, due to the anticipated rise in annual capital expenditures, Alphabet could face heightened pressure in the ongoing AI race. The company's Chief Financial Officer, Anat Ashkenazi, anticipates further increases in capital spending in 2026.

Alphabet CEO Sundar Pichai explained that the increase in capital expenditures is driven by strong demand for cloud services, with investments in AI infrastructure being crucial to meet the growing needs. Ashkenazi added that most of the funds will be allocated to expanding AI computing infrastructure to develop and operate AI models.

Despite the higher-than-expected spending, Google performed well in its core business areas, which have not weakened despite users shifting information access channels towards AI.

Alphabet Earnings Report, source: official website

In Q2, Google's search and advertising businesses continued to grow, with search revenue reaching $54.19 billion, an 11.7% increase year-over-year. Advertising revenue grew to $71.34 billion, up approximately 10.4%, with YouTube ad revenue at $9.796 billion. Citi noted that both Google Search and YouTube exceeded expectations, underscoring strong demand and business resilience. This aligns with Citi's previous research, indicating that 85% of users still use Google Search, and it remains the first choice for information for 72% of users.

Some analysts believe this success is due to Google's intense focus on AI and the integration of AI tools, such as the flagship AI model Gemini, into its vast product lineup, which is actively promoted to corporate clients. According to research findings, Google's AI integration seems effective. Evercore's survey showed that 68% of users found Google's Gemini/AI Overviews more effective than traditional search, with a significant increase in satisfaction.

Following the earnings release, Citi, UBS, and Jefferies all maintained their ratings on the stock, with Jefferies raising its price target to $230. Both Google's Class A (GOOGL) and Class C (GOOG) shares recently closed around $190.