TMTPOST -- Alphabet Inc. stocks dived more than 6.9% on Wednesday, erasing all their gains in the past three weeks. Shares sold off on slower-than-expected cloud sales and Google parent’s more aggressive artificial intelligence (AI) spending amid the shock from highly-efficient Chinese upstart DeepSeek.

Credit：Google

Alphabet reported revenue of $96.47 billion for the quarter ended December 31, missing Wall Street forecast of $96.62 billion. The Diluted earnings per share (EPS) for the quarter soared 31.1% year-over-year (YoY) to $2.15, compared with analysts’ estimates of $2.13. Operating income was $30.97 billion with a 83.2% YoY increase, whereas analysts expected $30.72 billion. The operating margin climbed 5 percentage points YoY to 32%, topping expectation of 31.9%.

From October to December 2024, Alphabet revenue grew 11.8% from a year ago, registering its slowest grow rate since the third quarter of 2023. While the core business digital advertising was stronger than Wall Street projection, the cloud computing business, which is deemed as the future growth engine, fell short of anticipated.

Google advertising generated $72.46 billion with a 10.6% YoY rise for the December quarter, compared with analysts’ forecast of $71.73 billion. In the segment, both Google Search and YouTube ad grew stronger than expected. Revenue from Google Search and other rose 12.5% YoY to $54.03 billion, versus analysts projected $53.29 billion. YouTube ad recorded revenue of $10.47 billion with a 13.8% YoY increase. The growth accelerated from 12.2% increase for the previous quarter, fueled by the U.S. presidential campaign last year. Analysts had expected YouTube contributed $10.22 billion.

Revenue from Google Cloud jumped 30% YoY to a new record of $11.96billion for the fourth quarter, but less than analysts estimated $12.19 billion. The increase in revenue was a sharper slowdown than expected following a 35% growth in the third quarter. Operating income of the business soared 142.2% to another quarterly record of $2.09 billion, beating estimated $2.04 billion. The growth of operating income still cooled compared with a 632% YoY increase three months ago. 

 Cloud is the business of tech giants that is currently most evidently benefiting from generative AI applications as their investments in developing AI helped drive demand for cloud services. Alphabet and Google CEO Sundar Pichai attributed the double-digit revenue growth to AI innovation and deployement.

“Q4 was a strong quarter driven by our leadership in AI and momentum across the business. We are building, testing, and launching products and models faster than ever, and making significant progress in compute and driving efficiencies,” said Pichai in a statement late Tuesday.” In Search, advances like AI Overviews and Circle to Search are increasing user engagement. Our AI-powered Google Cloud portfolio is seeing stronger customer demand, and YouTube continues to be the leader in streaming watchtime and podcasts. Together, Cloud and YouTube exited 2024 at an annual revenue run rate of $110 billion.”

Pichai said Alphabet expected to invest about $75 billion in capital expenditures (CapEx) in 2025. The planned spending was much more than analysts’ projected $57.9 billion. That spending suggested a YoY surge of nearly 43%, whereas the company’s CapEx grew 10.2% YoY for the year 2024.  

Alphabet’s high CapEx raised more concerns in light of supply constraints in the cloud business and search performance that merely met expectations. Alphabet could face more pressure from DeepSeek’s sudden rise as the search engine giant’s massive investment in AI hasn’t so far produced any outsized returns.

"With that in mind, it is still unclear to us whether Google will be able to extract increased monetization from AI?Overviews" relative to traditional search-engine results pages, "or how quickly supply constraints in [the Google Cloud Platform] will be alleviated, so for the time being we alongside investors will need to wait for sharper product development/release signals to materialize," UBS analyst Stephen Ju wrote. He has a neutral rating on the stock.