By Kenrick Cai and Deborah Mary Sophia
(Reuters) -Alphabet beat Wall Street estimates for its second quarter on Wednesday, and cited massive demand for its cloud computing services as it hiked its capital spending plans for the year to about $85 billion.
The search giant strongly beat estimates for quarterly revenue and profit on the back of new AI features and a steady digital advertising market.
Revenue growth was driven by Google Cloud’s sales, which surged nearly 32%, well above estimates for a 26.5% increase.
“With this strong and growing demand for our Cloud products and services, we are increasing our investment in capital expenditures.” CEO Sundar Pichai said in an earnings release.
Shares of the company, which have risen more than 18% since its previous earnings report in April, dipped initially in extended trading after the report before rallying on strong Cloud demand.
But investors were surprised by the planned capital spending increase.
“I don’t think anyone was expecting a change to that 2025 capex guide,” said Dave Wagner, portfolio manager at Aptus Capital Advisors. “Google had an amazing quarter. It was an easy beat, and it was just offset by this $10-billion increase in capex.”
Google had earlier pledged about $75 billion in capital spending this year, part of the more than $320 billion that Big Tech is expected to pour into building AI capabilities.
The rise of artificial intelligence technologies has propelled demand for cloud computing services.
Google Cloud still trails Amazon’s AWS and Microsoft’s Azure in total sales, but has tried to gain ground by touting AI offerings, including its in-house TPU chips to land lucrative enterprise contracts.
In a huge win for Alphabet, ChatGPT maker OpenAI recently added Google Cloud to its list of cloud capacity suppliers, as Reuters exclusively reported in June, in a surprising collaboration between two companies that are competing head-to-head in AI. It also marked OpenAI’s latest move to diversify beyond its major backer Microsoft.
The capex increase nevertheless raises concerns about Alphabet’s pace of monetization and its impact on near-term profitability, Investing.com senior analyst Jesse Cohen said.
Alphabet and its peers have defended their aggressive AI spending amid rising competition from Chinese rivals and investor frustration with slower-than-expected payoffs, saying those massive investments are necessary to fuel growth and improve their products.
Alphabet reported total revenue of $96.43 billion for the second quarter ended June 30, compared with analysts’ average estimate of about $94 billion, according to data compiled by LSEG.
The company reported profit of $2.31 per share for the period, beating estimates of $2.18 per share, according to LSEG data.
Google’s advertising revenue, which represents about three-quarters of the tech major’s overall sales, rose 10.4% to $71.34 billion in the second quarter, beating expectations for $69.47 billion, according to data from LSEG.
(Reporting by Deborah Sophia in Bengaluru and Kenrick Cai in San Francisco; Editing by Devika Syamnath and Rod Nickel)
