(Bloomberg) — Alphabet Inc. said demand for artificial intelligence products boosted quarterly sales, and now requires an extreme increase in capital spending — heightening pressure on the company to justify the cost of keeping up in the AI race.
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Google’s parent company said 2025 capital expenditures will be $85 billion, or $10 billion greater than an earlier forecast. Although Alphabet beat expectations for second-quarter revenue and profit, its stock initially sank in after-hours trading, then rebounded after Chief Executive Officer Sundar Pichai explained that the investments are necessary in order to keep up with customer needs. “Our AI infrastructure investments are crucial to meeting the growth in demand from cloud customers,” he said on a call Wednesday following the report.
As Microsoft Corp., startup OpenAI, Meta Platforms Inc. and others continue to pour money into AI, Alphabet has little choice but to follow suit, analysts said. The race is particularly urgent for Google: competitors are building chatbots that may eventually appeal to consumers more than its flagship search product. “Google’s hand is forced by OpenAI to spend tremendously on AI’s infrastructure and applications,” said Nikhil Lai, an analyst at Forrester.
Alphabet shares rose as much as 2.8% in premarket trading on Thursday. They’d closed 0.6% lower at $190.23 in New York trading on Wednesday and have gained about 10% in the last 12 months.
The recent quarter was strong almost across the board for Alphabet. Sales, excluding partner payouts, climbed to $81.7 billion, Alphabet said in a statement, topping analysts’ projections of $79.6 billion on average, according to data compiled by Bloomberg.
Alphabet is counting on its core search advertising juggernaut and growing cloud computing business to support its spiraling spending on AI. Employees are under pressure to bring AI products to market faster, from new modes of search to tools for cloud customers. “We are seeing significant demand for our comprehensive AI product portfolio,” Pichai said.
Chief Financial Officer Anat Ashkenazi said capital expenditures will rise yet again next year, without providing details.
The strain of the AI race could be spotted elsewhere in the company’s results. Ashkenazi attributed the company’s 16% jump in spending on research and development to increases in pay packages for key employees. Meta has been making unprecedented compensation offers as it seeks to woo researchers for its superintelligence lab, driving up the price for key employees across the industry.
Earlier this month, Google struck a deal to pay about $2.4 billion for top talent and licensing rights from artificial intelligence coding startup Windsurf. Yet money isn’t the only consideration for researchers when deciding where to work, Pichai said.
Top talent in the field want “to really be at the frontier driving progress,” in addition to craving access to computing power and talented peers, Pichai said. “It’s a combination of all of that and using it to drive impact. And I think we are pretty competitive on all those fronts.”
Google’s cloud-computing unit reported quarterly revenue of $13.6 billion and operating income of $2.83 billion, topping analysts’ projections. Google remains in third place in this market, after Microsoft and Amazon.com Inc., but the company’s prowess in AI has helped it score client wins. The unit is widely viewed as Alphabet’s strongest source of growth as the main search business matures.
The centerpiece of the cloud offensive is Gemini, the AI model that Google is rapidly weaving across its vast product portfolio, and pushing to enterprise clients. Many AI experts were impressed by the release of a new version of the Gemini model earlier this year, but it still trails OpenAI’s ChatGPT in adoption by most estimates.
As Google faces mounting competition, it’s also facing penalties for being dominant. Google’s primary businesses are under threat of a breakup after US federal judges ruled that the company is maintaining illegal monopolies in search and some ad technology. Next month, Judge Amit Mehta is expected to deliver an order on the measures Google must take to restore competition in online search, though Google has said it plans to appeal the ruling.
YouTube, Google’s video site, posted $9.8 billion in second-quarter ad revenue, exceeding analysts’ estimates of $9.56 billion. The unit, which draws most of its revenue from advertising, was expected to perform well thanks to its lead in living-room streaming and heavy investments in podcasts.
Alphabet’s Other Bets, a collection of futuristic businesses that includes the self-driving car effort Waymo, generated $373 million in revenue, missing estimates for $429.1 million. Ashkenazi said Alphabet will continue devoting more resources to Waymo.
Alphabet has been aggressively expanding the operations of Waymo, which may soon face increased competition as Tesla ramps up its robotaxi business. Earlier this month, Waymo more than doubled its service area in Austin, Tesla Inc.’s home base, and said it would start collecting data in New York City in pursuit of a permit for testing.
“The team is testing across more than 10 cities this year, including New York and Philadelphia,” Pichai said. “We hope to serve riders in all 10 in the future.”
Google isn’t alone in feeling pressure to show success from AI investment. Shortly after Pichai’s Waymo comments, on the Tesla earnings call, Chief Executive Officer Elon Musk started slamming Google’s AI prowess. He said Tesla was “actually much better than Google.” Investors might disagree; Tesla’s shares fell.
(Updates with premarket share move in fourth paragraph)
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