Google's earnings exceeded expectations, adding fuel to the AI cash-burning war

Alphabet, Google's parent company, is driving the AI race in Silicon Valley into a new phase with its strong second-quarter performance. The company achieved better-than-expected growth while significantly increasing its investments.

Alphabet's financial report released on Wednesday showed that for the second quarter ending in June, the company's revenue grew by 14% year-on-year, with search business revenue increasing by 12% and cloud computing business growing by 32%. These figures alleviated investors' previous concerns that economic weakness might hinder growth.

Google also announced a significant upward revision of its capital expenditure forecast, raising it from $75 billion to $85 billion, which is equivalent to 22% of expected annual revenue. This level of investment marks the highest annual proportion since 2006.

In the face of strong competitors like Meta and OpenAI, Google continues to increase its investments across multiple dimensions, which is expected to drive further increases in capital expenditure across the entire tech industry.

Huge investments are beginning to pay off, supporting further increases in capital expenditure

Google's massive investments are starting to show results. For example, AI Overviews, which are algorithm-generated summaries that appear at the top of search results when users ask questions, have not diminished the value of search ads as the market feared. On the contrary, Google stated that user query volume increased by 10% in searches featuring AI Overviews, and there was no negative impact on revenue. The company revealed during Wednesday's analyst call that paid clicks increased by 4% year-on-year.

While AI is yielding returns, it also brings astonishing costs. Google has raised its capital expenditure budget for data centers and other areas to about $85 billion this year, nearly four times what the company spent in 2020 (when the AI race had not yet heated up). According to LSEG data, this expenditure is expected to account for 22% of the company's revenue this year, the highest annual proportion since 2006.

Although Pichai claimed that these investments have begun to generate value, his response was relatively vague when analysts inquired about specific financial returns. This indicates that even leading companies in the industry find it challenging to accurately quantify the direct returns from AI investments.

The competitive pressure facing Google is not to be underestimated. Competitors like Meta Platforms and OpenAI are well-funded and are making significant investments to win the AI arms race.

In the device sector, Meta is leading the race for AI-driven glasses, while OpenAI is collaborating with former Apple design chief Jony Ive to develop new devices. In response, Google has established a preliminary partnership with eyewear manufacturer Warby Parker.

This multidimensional competitive landscape means that companies must simultaneously focus on multiple fronts, including data centers, algorithm development, and hardware devices. Other tech giants are also expected to follow suit in increasing capital expenditure, further raising the investment levels across the entire industry