Alphabet, the parent company of Google, is set to report its earnings on Tuesday, and investors are expected to closely examine the company’s massive spending on artificial intelligence (AI). The tech giant’s revenue growth likely slowed in the holiday quarter due to a deceleration in its advertising and cloud businesses. This comes at a time when Alphabet, like other U.S. tech heavyweights, is under pressure to justify its capital expenditure amid growing competition in the AI space.

AI Spending and Market Competition

Alphabet’s capital expenditure for 2023 is estimated to have reached $50 billion, according to data from LSEG. The company has also signaled plans to increase spending through 2025 to support its cloud expansion and AI-driven search features. These investments are seen as critical to defending Alphabet’s market share and attracting more advertising revenue.

However, the AI industry is becoming increasingly competitive. Last month, Chinese startup DeepSeek launched low-cost AI models, threatening to push the sector into a price war. This development has raised questions about whether Alphabet’s hefty spending on AI will deliver the expected returns.

Microsoft and Meta Platforms, two of Alphabet’s biggest rivals, have also been investing heavily in AI. Last week, executives from both companies defended their spending plans, arguing that such investments are essential to maintaining a competitive edge in the rapidly evolving field.

Slowing Growth in Google Cloud

Google Cloud, one of Alphabet’s key growth drivers, is expected to report a slowdown in revenue growth for the fourth quarter. The segment had previously notched its fastest growth in two years during the September quarter, driven by rising AI spending by businesses. However, analysts predict that growth will decelerate in the holiday quarter.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, noted that while Google Cloud’s growth rate is expected to slow, elevated investment in the segment is likely to continue. She emphasized that sustaining a balance between investment and profitability will be crucial for Alphabet.

“Efficiency gains have so far kept profits buoyant, but investors will want to see evidence that this balancing act can be maintained,” Streeter said.

Advertising Revenue Under Pressure

Alphabet’s advertising business, which includes Google Search and YouTube, is also facing challenges. Revenue from Google’s Search and Other business is expected to have risen 11.2% in the fourth quarter, according to Visible Alpha estimates. While this represents solid growth, it is slower than the 12.2% increase recorded in the third quarter.

The company is battling rising competition from e-commerce giant Amazon and social media platforms like TikTok, which are increasingly encroaching on Google’s dominant share of the search advertising market.

On a positive note, higher political ad spending around the U.S. Presidential elections may have provided a boost to Google’s advertising revenue in the fourth quarter. Meta, the parent company of Facebook, recently reported a similar uptick in ad revenue, driven by political campaigns.

However, Meta’s subdued first-quarter forecast has sparked concerns about the broader ad market outlook. Economic uncertainty, fueled by the looming threat of global tariffs, could further dampen advertising revenue growth for Alphabet and its peers.

Investor Confidence in AI Bets

Despite these challenges, Alphabet’s shares have risen about 7% this year, following a 35% rally in 2023. This reflects growing investor confidence in the company’s AI initiatives. Alphabet has been integrating AI into its core products, including Google Search, where it has introduced AI-powered summaries to enhance user experience.

However, worries about a potential slowdown in Alphabet’s cloud business have mounted since Microsoft reported lackluster numbers last week. Microsoft’s Azure cloud computing growth slowed in the December quarter as the company prioritized AI services over its core cloud offerings.

D.A. Davidson analyst Gil Luria highlighted the importance of Alphabet demonstrating that its cloud business remains strong despite the focus on AI.

“We’re going to want to see if Google has the same issues that Microsoft did, where AI was a source of growth but the core hyperscaler business performed poorly,” Luria said.

Outlook for Google Cloud

According to LSEG data, Google Cloud is expected to report a 32% rise in revenue for the fourth quarter, following growth of 35% in the third quarter. This would outpace much larger rivals like Microsoft, which reported a 31% jump in Azure revenue, and Amazon, whose cloud business is estimated to have grown by 19%.

The strong performance of Google Cloud is critical to Alphabet’s overall growth strategy. The segment has become a key driver of revenue as the company seeks to diversify beyond its advertising business.

Conclusion

As Alphabet prepares to release its earnings report, investors will be closely watching the company’s ability to balance its massive AI investments with sustained growth in its core businesses. The slowdown in advertising and cloud revenue growth, coupled with rising competition in the AI space, presents significant challenges for the tech giant.

However, Alphabet’s strong position in the search and cloud markets, combined with its ongoing AI innovations, provides a solid foundation for future growth. The company’s ability to navigate these challenges and deliver on its AI promises will be key to maintaining investor confidence and driving long-term success.

With the tech industry at a pivotal moment, Alphabet’s earnings report will offer valuable insights into the company’s trajectory and the broader trends shaping the future of AI and cloud computing.