Alphabet (GOOGL) is now in the penalty box.
Shares tanked 8% in pre-market trading on Wednesday following a fourth quarter revenue miss. The culprit? Softer than expected sales in cloud services (similar to rival Microsoft's (MSFT) latest earnings) and a deceleration in the business from the preceding quarter.
CFO Anat Ashkenazi pinned the blame on the earnings call on being "capacity constrained" in the cloud, pointing to still strong demand. But investors aren't having it, opting to dump the stock and also voicing concern on $75 billion in capital expenditure plans for 2025 — well above whisper numbers into the quarter of around $60 billion.
The concerns overshadow growth in the company's lucrative search business, which rose 13% in the quarter. YouTube ad sales also drew praise from the Street, up 13.8%.
Here's what Wall Street is saying about Alphabet's squishy quarter. Keep an eye on the chof360 Finance analysis section of Alphabet's ticker page — it's likely that analysts will lower their sales and profit estimates after the cloud-computing letdown in the fourth quarter and hearty capex guidance.
"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, from Search to Android to Google Cloud, such as the use of AI Overviews in Search which is increasing user satisfaction and driving higher usage. Management cited tougher comps and capacity constrains as headwinds to the Google Cloud business this past quarter, but did not comment further."
"Alphabet reported a decent but overall mixed quarterly result/guidance with search and YouTube revenue nicely higher than expected, services operating income ahead of expectation, while key cloud revenue/operating income coming in light and showed signs of deceleration (that management attributed to a lack of data center capacity) which drove 2025 capital expenditures well ahead of our ($58 billion) and consensus expectations at $75 billion. 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 which is why the stock is, reasonably, selling off in the aftermarket. Given 15-20% cloud penetration of enterprise we feel comfortable about the long-term upside from the move to the cloud, which should be enhanced by the much more rapid development of AI, but 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."
Story Continues
"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. Google now expects 2025 capex of ~$75 billion — up 43% following a 63% increase in 2024 — as it continues to invest in AI infrastructure including servers, data centers, and networking equipment. Cloud revenue grew 30% — decelerating from +35% in 3Q — and Google noted that it is capacity constrained as demand outstrips supply, in theory a good problem to have. In terms of costs & margins, 4Q operating income margin of 32.1% was a bit light, but still reflected 465bps of year over year margin expansion (+325bps excl. 1x items). The bigger question is whether Google can continue to expand margins in 2025 given likely slower revenue growth and accelerating depreciation. Our 2025 operating income comes down 2% to $126 billion & now assumes a more modest 50bps of margin expansion.
Brian Sozzi is chof360 Finance's Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram and on LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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