Shares of Alphabet (GOOG 1.16%)(GOOGL 1.19%) have been falling in recent days after the company released its earnings numbers. Investors are bearish on the tech giant after it missed expectations for revenue. While the miss on the top line isn't great news, and it may weigh on the stock in the short term, another number could end up being more concerning for Alphabet investors this year: The amount it has planned for capital expenditures.
Alphabet is planning to spend heavily on artificial intelligence
On Feb. 4, Alphabet reported its latest earnings numbers, for the last three months of 2024. Sales totaled $96.47 billion and rose 12% year over year. More importantly, however, those numbers came in lower than the $96.56 billion analysts were expecting for the period. And when expectations are high for a company like Alphabet, any miss can lead to a drop in the share price.
The bigger issue that may also worry investors is that the company is planning to spend $75 billion on its capital expenditures in 2025. That's a significant 43% increase compared with the $52.5 billion that it spent in 2024. The company is investing heavily in artificial intelligence (AI) as it looks to enhance its offerings with next-gen technologies.
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This, however, comes at a time when many investors are growing concerned about how aggressively tech companies are spending on AI. Last month, Chinese AI company DeepSeek released an AI model which it said cost a fraction of what it took to create ChatGPT and yet performed similarly to the popular chatbot.
Why spending heavily on AI could backfire
Tech companies have been spending aggressively on AI as they look to keep up with their rivals. But the danger is that all that spending may not yield better results, at least not for a while. Last year, Alphabet CEO Sundar Pichai warned that 2025 could be a slow year for the development of AI, saying that the "low-hanging fruit is gone" and that "the hill is steeper."
Amid more challenging economic conditions, companies may also significantly scale back their AI-related projects and expenditures. Research company Gartner projects that by the end of this year, as many as 30% of generative AI projects may become abandoned, as businesses may give up due to rising costs or not seeing a clear payoff from their investments.
Spending heavily on capital expenditures and bringing on more staff may result in cost reductions and layoffs later on, as has sometimes been the trend in tech when it comes to overspending. While there are opportunities in AI, it can be easy for companies to get ahead of themselves and spend too feverishly.
Alphabet still looks like a good long-term buy
There is a risk that Alphabet could end up overspending on AI, but I believe the net benefit will be a positive one for investors. Even if its AI spending doesn't result in game-changing products and services right away, there's a lot of potential for Alphabet in bolstering and enhancing assets like Google Search and YouTube with the help of AI.
Alphabet's stock currently trades at a relatively modest 23 times its trailing earnings. That's cheap compared to the average stock in the Technology Select Sector SPDR Fund, which trades at 39 times its profits.
There might be some adversity ahead for Alphabet. But as long as you are comfortable with some short-term risk, the tech stock can still be an excellent investment to hold on to, especially over the long run.
