Newly appointed CFO Anat Ashkenazi told analysts to expect a small step-up in Alphabet's (GOOG 2.45%) (GOOGL 2.34%) capital investments in 2025 during the tech giant's third-quarter earnings call. "Likely not the same percent step-up that we saw between '23 and '24, but an additional increase," she said in late October.
Alphabet ended up spending roughly $52.5 billion in 2024, up 62.5% from the $32.3 billion it spent in 2023. So I guess, by comparison, the 43% increase she forecast for fiscal 2025 capital expenditures is merely an "additional increase."
Alphabet says it will spend $75 billion on capital expenditures in 2025, most of which will go toward building cloud infrastructure for artificial intelligence training and inference. Prior to Alphabet's updated forecast, Wall Street analysts had expected the figure to be just $58 billion for the year, based on Ashkenazi's previous comments.
While Alphabet is spending heavily to support artificial intelligence -- and with good reason -- it spent more than $69 billion on something else entirely in 2024, and it's one of the best reasons for investors to buy shares and hold them forever.
Image source: Getty Images.
The massive AI budget can't be ignored
Alphabet is far from the only big tech company spending tens of billions of dollars on AI infrastructure this year. And that may be a big reason why it feels the need to spend so much.
"The risk of underinvesting is dramatically greater than the risk of overinvesting for us here," CEO Sundar Pichai said during Alphabet's second-quarter earnings call in July. That has actually already shown up in its financial results.
The Google Cloud segment's revenue growth decelerated to 30% in the fourth quarter. Many investors were disappointed with that, which is one of the reasons the stock price fell after the earnings report. But Ashkenazi was keen to point out that demand for Google Cloud is outstripping available capacity at the moment and it's working to bring more capacity online as quickly as possible. That means it needs to spend more.
The fruits of the spending should appear in short order, as Google Cloud growth should remain strong throughout 2025.
NASDAQ: GOOG
Key Data Points
Importantly, the company is starting to see returns on its AI spending within its core Google operations as well. AI Overviews, which has expanded to over 100 countries and answers more search queries every day, has helped grow overall search traffic on Google. It recently rolled out ads on AI Overviews, and management says the monetization rate is approximately the same for those ads as for traditional search ads. In other words, Google's product is successfully staving off the threat of other AI tools for information discovery without cannibalizing its ad revenue.
Other AI innovations like Circle to Search and Google Lens have further bolstered high-value searches for products or shopping. So, Alphabet is starting to see meaningful returns on its massive AI spending outside of its cloud platform.
Even as it spends much more than was anticipated on AI, though, investors should look at how it impacts an even more important factor for the stock.
Here's Alphabet's biggest cash expense from 2024
In 2024, the one thing Alphabet spent more on than capital expenditures was capital returns to shareholders. It spent approximately $62 billion buying back shares of its own stock and another $7 billion on dividends.
Even with the "additional increase" in capital investments planned for 2025, there's a good chance Alphabet could return even more money than that to shareholders again. That's because it's a free cash flow machine.
Its 2024 free cash flow totaled $72.8 billion. And while Alphabet is planning to spend $22 billion more on data centers and the chips and networking equipment that go inside them in 2025, it could still see an improvement in free cash flow this year.
As mentioned, Google Cloud's revenue growth is poised to reaccelerate as more capacity comes online. As it scales, it has seen strong operating margin expansion, reaching 14% last year. But larger public cloud platforms have operating margins more than twice as big, indicating Alphabet could see billions more in operating income from Google Cloud in 2025.
Further AI-powered improvements in search as well as in ad-buying and creatives could help grow the core business, further offsetting the increased spending on data centers. With plenty of cash already on the balance sheet, it's likely Alphabet will once again route the vast majority of its free cash flow into its capital return program in 2025.
Why that makes Alphabet a stock to buy and hold forever
The size of Alphabet's share-repurchase program ensures that it will be able to generate strong earnings-per-share growth over the long run even if there are only modest improvements in the business. So while its increased spending on artificial intelligence could weigh on net income in 2025 and beyond as depreciation expenses start hitting the income statement, investors should still see strong improvements in earnings per share. And that extends well into the future, as Alphabet will look to invest in the next thing that could represent a step-change in its business.
With the strong free-cash-flow generation from its core operations, plus the growing profitability of its cloud computing business, Alphabet looks poised to increase its capital returns in 2025 and beyond. And that makes it an extremely shareholder-friendly stock to own.
Moreover, with shares trading at less than 21 times earnings estimates for the next 12 months, the stock looks like a bargain. It might be worth taking this opportunity to add shares to your portfolio and hold onto them forever.
