Want insight into the business prospects for a company? Pay attention to what its biggest customers are saying.
Alphabet (GOOG 0.20%) (GOOGL 0.39%) provided its fiscal 2024 fourth-quarter update after the market closed on Tuesday. And the Google parent delivered great news for Nvidia (NVDA +2.59%) investors worried about the impact of Chinese artificial intelligence (AI) company DeepSeek.
NASDAQ: GOOGL
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A silver lining for Nvidia with Google's disappointing Q4 growth
Unfortunately, Alphabet's news wasn't so great for its own investors. The tech giant's shares sank around 8% in early trading on Wednesday after the Q4 update Tuesday evening.
At first glance, Alphabet's numbers might not seem bad at all. Revenue increased 12% year over year to $96.47 billion. Net income jumped 38%, with earnings per share soaring 31% to $2.15. Google Cloud revenue vaulted 30% higher to $12 billion.
What was wrong with those results? Analysts surveyed by LSEG were expecting higher Q4 revenue of $96.56 billion. Google Cloud was the primary culprit, with lower-than-anticipated revenue growth. In addition, Alphabet projected capital expenditures in 2025 Q1 of between $16 billion and $18 billion, well above the level expected by Wall Street.
However, there's a silver lining for Nvidia with Google Cloud's disappointing Q4 growth. Alphabet CEO Sundar Pichai noted that cloud revenues "are correlated with the timing of deployment of new capacity." CFO Anat Ashkenazi confirmed that the company continues to have greater demand for cloud services than it has available capacity, driven by demand for its AI products. In other words, Google Cloud could have generated more revenue in Q4 if it had more capacity.
Ashkenazi said, "[W]e are in a tight supply demand situation, working very hard to bring more capacity online." That's the reason behind Alphabet's greater-than-expected Q1 capital expenditures. The company plans to spend more on building out its technical infrastructure, especially servers, data centers, and networking.
All of this should be music to Nvidia's ears. Although Google has its own AI chips, it still relies heavily on Nvidia's GPUs. In the Q4 earnings call, Pichai highlighted his company's "strong relationship with Nvidia." He noted that Google was the first to announce a customer using Nvidia's new Blackwell platform. Google needs more capacity to handle AI demand; Nvidia will almost certainly benefit.
DeepSeek, shmeepseek?
The market reaction to DeepSeek's launch of its R1 reasoning model seemed to indicate that Nvidia's best days are behind it. Many investors panicked in fear that the Chinese AI company's cost-effective technology might shake up the AI world and drastically reduce the demand for Nvidia's GPUs.
NASDAQ: NVDA
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However, when asked in the Q4 earnings call about DeepSeek's impact, Pichai didn't sound alarmed whatsoever. He first complimented the work that the DeepSeek team had done. But he wasn't surprised about the company's progress. Pichai even argued that Google Gemini 2.0 Flash and 2.0 Flash thinking models "are some of the most efficient models out there, including comparing to DeepSeek's V3 and R1."
What's the key takeaway? The CEO of one of Nvidia's biggest customers doesn't view DeepSeek as a huge threat. And this big customer needs more capacity (and therefore more Nvidia GPUs) despite having what it considers to be the most efficient AI models around. That should be welcome news for investors who are concerned about DeepSeek's challenge to Nvidia.
Pichai also noted, "[T]he proportion of the spend toward inference compared to training has been increasing." He added that the rise of reasoning models "accelerates that trend." This could translate to sustained demand for Nvidia's GPUs.
The future is still bright for both companies
I think Alphabet and Nvidia are alike in several ways. Both stocks have been beaten down by concerns that appear to be only temporary, in my view. Alphabet's revenue growth should rebound as it ramps up cloud capacity. I also think fears about a disruptive threat to Nvidia from DeepSeek will also fade over time. The future is still bright for both companies.
