By Alphabet (GOOGL), the tech behemoth behind Google, has landed in Wall Street’s crosshairs following a fourth-quarter earnings report that exposed vulnerabilities in its cloud computing performance and fueled anxieties about escalating expenditures.
Shares of Alphabet tanked by 8% in pre-market trading on Wednesday, a reaction to weaker-than-anticipated revenue in its cloud services division.
This echoed similar headwinds experienced by rival Microsoft (MSFT) and signaled a concerning deceleration in the business’s momentum compared to the previous quarter.
Capacity constraints vs. investor skepticism
CFO Anat Ashkenazi attributed the shortfall to “capacity constraints” during the earnings call, suggesting that robust demand outstripped available resources.
However, this explanation failed to appease investors, who responded by shedding shares and voicing apprehension about the company’s projected $75 billion in capital expenditures for 2025 – a figure significantly surpassing prior expectations of approximately $60 billion.
While Alphabet’s core search business demonstrated commendable growth of 13%, and YouTube ad sales impressed with a 13.8% surge, these successes were overshadowed by the prevailing concerns surrounding the cloud division and burgeoning expenses.
As analysts dissected Alphabet’s latest performance, a consensus emerged that the Yahoo Finance analysis section of the company’s ticker page will likely reflect downward revisions in sales and profit estimates, acknowledging the cloud computing setback and heightened capital expenditure outlook.
DA Davidson: AI integration and capacity headwinds
DA Davidson analyst Gil Luria reiterated a “Neutral” rating and a $200 price target.
Luria stated:
We maintain our Neutral rating and $200 price target following disappointing 4Q24 earnings that were underscored by a miss on top-line expectations and decelerating Google Cloud growth. Alphabet is seeing benefits to the integration of AI throughout their product portfolio… Management cited tougher comps and capacity constrains as headwinds to the Google Cloud business this past quarter, but did not comment further.
Pivotal Research Group: cloud upside hinges on execution
Pivotal Research Group analyst Jeffrey Wlodarczak reaffirmed a “Buy” rating and a $225 price target, but tempered optimism with caution.
He noted:
Alphabet reported a decent but overall mixed quarterly result/guidance… slower than expected growth at the key future revenue driver for the company and much higher capex to drive that growth is a tough combo… Alphabet management is likely going to be in “show-me” mode that 4Q cloud results were a hiccup on the way to much higher revenue/operating income growth.
JP Morgan: capex surge and margin pressures loom
JP Morgan analyst Doug Anmuth, while reiterating an “Overweight” rating, lowered the price target from $232 to $220.
Anmuth highlighted key concerns:
We believe the biggest pushbacks to the quarter come around 3 C’s: 2025 Capex, Cloud revenue trajectory, and 4Q/2025 costs/margin expansion potential… The bigger question is whether Google can continue to expand margins in 2025 given likely slower revenue growth and accelerating depreciation.
RBC: view model reset as opportunity
RBC analyst Brad Erickson maintained an “Outperform” rating and a $235 price target, suggesting a more bullish outlook.
Erickson stated:
Alphabet’s Q4 report keeps the AI search bear case at bay but it was no match for an unexpected cloud miss and significantly raised capex outlook nearly 30% above Street… Would view this model reset as an opportunity.
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