Alphabet (GOOGL) Stock Drops 5% Despite Earnings Beat as AI Spending Plan Shocks Investors

TLDR

• Alphabet shares dropped 4-5% in premarket trading despite beating Q4 earnings expectations with $2.82 EPS versus $2.63 estimated and $113.8 billion revenue versus $111.3 billion expected.
• Google Cloud revenue jumped 48% year-over-year to $17.7 billion, crushing the $16.18 billion forecast, with operating margins expanding to 30.1% from 17.5% last year.
• Alphabet plans to more than double capital expenditure spending in 2026 to $175-185 billion, well above the $115 billion analysts expected, focused on AI infrastructure.
• Search advertising revenue grew 17% year-over-year, beating expectations, while YouTube ads underperformed with only 9% growth versus the $11.84 billion estimate.
• Cloud backlog increased 55% to $240 billion, and the company expects to remain supply-constrained in AI compute capacity throughout 2026.

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Alphabet shares fell roughly 5% in premarket trading Thursday morning. The drop came despite the company posting strong fourth-quarter earnings that topped Wall Street expectations.

Alphabet Inc., GOOGL

The tech giant reported earnings per share of $2.82 for the fourth quarter. Analysts had expected $2.63. Revenue reached $113.8 billion, beating the $111.3 billion consensus estimate.

So why the selloff?

Investors got spooked by Alphabet’s massive AI spending plans. The company announced it will spend between $175 billion and $185 billion on capital expenditures in 2026. That’s more than double the $115 billion analysts were expecting.

Most of that money will go toward AI computing infrastructure. CEO Sundar Pichai said Google Cloud will still face supply constraints in 2026 despite the huge investment.

Google Cloud delivered the standout performance of the quarter. Revenue surged 48% year-over-year to $17.7 billion. That crushed the Street Account forecast of $16.18 billion.

Cloud Margins Expand While Spending Accelerates

Cloud operating margins also impressed. They expanded to 30.1% in the fourth quarter from 17.5% a year earlier. Analysts had expected margins of 22.7%.

CFO Anat Ashkenazi warned that depreciation expenses from all this spending will accelerate in 2026. That could pressure Google Cloud’s operating margins going forward.

Cloud backlog jumped 55% to $240 billion. The growth shows strong customer demand for AI cloud services.

Search advertising revenue grew 17% year-over-year. That performance beat expectations and eased fears that AI search tools might hurt Google’s core business. AI overviews now appear at the top of many search results.

YouTube advertising disappointed with only 9% growth. Revenue came in at $11.38 billion versus estimates of $11.84 billion.

Analysts React to Spending Plans

Barclays analysts noted that infrastructure, DeepMind, and Waymo costs weighed on profitability. They expect these pressures to continue in 2026.

Deutsche Bank analysts said Alphabet has “stunned the world” with its huge spending plan. They wrote that with tech in flux, it’s unclear whether the massive investment is good or bad.

Alphabet has made major strides in AI over the past year. The Gemini 3 models released in November put Google on par with OpenAI and Anthropic. The company also built momentum for its TPU chips through a large Anthropic partnership.

One antitrust trial concluded with less severe punishments than feared. Both Google and the Justice Department are appealing.

Alphabet stock has surged 81% over the past six months. The company shed nearly 2% on Wednesday before the earnings release.

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