AI investment pays off, Google Cloud accelerates its takeoff

Alphabet, Google's parent company, reported strong fourth-quarter results, with both cloud services and search advertising accelerating growth, proving that its massive investments in artificial intelligence are paying off.

The financial report released by Alphabet on Wednesday showed that revenue growth for Google’s search business accelerated from 15% in the third quarter to nearly 17%, while revenue growth for Google Cloud surged by 14 percentage points to 48%. This performance alleviated previous market concerns that AI chatbots might weaken Google’s search business.

Based on fourth-quarter revenue, Google Cloud's annual revenue is projected to reach $71 billion, a significant leap from less than $20 billion in 2021. Notably, the business achieved rapid growth while increasing its operating profit margin from 23.7% in the third quarter to 30%.

Despite the impressive results, Alphabet's stock fell by one to two percent in after-hours trading. The company announced that its capital expenditures would double this year to between $175 billion and $185 billion to build more computing capacity, a figure that exceeds the $164.7 billion cash flow it expects to generate in 2025.

Cloud Business Achieves Scalable Profitability

The performance of Google Cloud demonstrates that it has become a true business. Based on fourth-quarter revenue, the annualized revenue for this business reached $71 billion, an extraordinary achievement for a business that generated less than $20 billion in 2021. In comparison, industry leader Amazon Web Services (AWS) had an annualized revenue of $132 billion as of the third quarter.

While a 30% operating profit margin is still lower than that of larger competitors, Google Cloud has finally proven itself to be a sustainable business. Few companies in the tech industry succeed in both consumer and enterprise markets; Amazon is one of the few, and Google appears to be on track to become another.

Additionally, the growth of the search business should quell investors' concerns from a year or two ago that AI chatbots would undermine Google’s search business. Chief Business Officer Philipp Schindler stated during the analyst call that AI is helping Google improve ad effectiveness and enabling it to serve ads in more complex search queries than before.

The revenue growth for Google Search accelerated from 15% in the third quarter to nearly 17% in the fourth quarter, demonstrating the positive impact of AI technology on its core business.

Huge Capital Expenditures Raise Cost Concerns

Alphabet stated that it will double its capital expenditures this year to between $175 billion and $185 billion to build more computing capacity. This expenditure level exceeds the $164.7 billion cash generated by its business in 2025. The company has already increased its debt, and at this rate, it will have to borrow more funds in the future. The company has also cut back on stock buyback expenditures.

In addition to capital expenditures, Alphabet also needs to cover operational costs related to AI. The company separately listed the costs of its DeepMind AI research division, which grew more than double to $5.9 billion in the fourth quarter. Alphabet stated that this project mainly involves AI costs shared across various business units As of December 31 last year, the total number of employees at Alphabet reached 190,820, surpassing the peak level before the large-scale layoffs at the beginning of 2023.

Although Alphabet's overall situation currently looks bright, especially compared to other companies, investors are currently uneasy about the costs associated with AI technology. This week's significant sell-off in software stocks is partly due to concerns that AI may undermine existing software businesses, and worries about the costs of AI development are also casting a shadow over the market