Alphabet shares fall despite strong earnings on AI spending concerns

Alphabet shares dropped 5% on Thursday morning, even after the company posted better-than-expected Q4 results. The sell-off came after the company announced a massive capital expenditure forecast for 2026, ranging between $175 billion and $185 billion, more than double its 2025 spending. On top of that, YouTube ad revenue missed estimates, spooking investors even further.

For the fourth quarter, Alphabet posted earnings of $2.82 per share on revenue of $113.83 billion, beating analyst estimates of $2.63 and $111.43 billion, respectively.

Metrics like Google Cloud revenue and traffic acquisition costs also came in stronger than expected. But YouTube ads only brought in $11.38 billion, which was below forecasts. UBS analyst Stephen Ju said the shortfall was “partially due to some brand issues.”

Bernstein’s Mark Shmulik added that YouTube ads only grew 9% year-over-year, and subscriptions, platforms & devices rose just 17%, both considered soft in this environment.

Analysts react to YouTube ad miss and massive AI spending plans

Despite the strong headline numbers, all eyes were on Alphabet’s spending plans. CFO Anat Ashkenazi told analysts on the earnings call that the 2026 capex would target AI compute infrastructure for Google DeepMind, as well as cloud customer demand and strategic investments in other areas.

Deutsche Bank’s Benjamin Black said the big capex was a potential long-term advantage: “The resulting infrastructure footprint creates a meaningful moat that few (if any) can replicate.”

JPMorgan’s Doug Anmuth pointed out that Gemini now has 750 million monthly active users, and Cloud revenue grew 48%, with backlog up 55% quarter-over-quarter to $240 billion. He added that Search revenue also climbed 17%, showing how AI is driving usage.

Still, investors were rattled by the size of the investment. Bernstein’s Shmulik said, “A week ago this print would have been bought up, but it’s February, and it seems no revenue beat is enough.”

UBS warned that tight compute supply might limit near-term growth, even with the spend. The firm noted the capex guide was $55 billion higher than it had expected, raising total costs by $16 to $24 billion, and only lifting 2027 EPS by 1%.

Wall Street firms adjust targets and ratings for Alphabet

Wall Street didn’t turn bearish, but it wasn’t exactly cheering either. Morgan Stanley maintained an overweight rating with a $330 target, calling Alphabet’s investments another example of “big players pulling away from the pack.”

Bernstein bumped its target to $345, warning that some investors now think Alphabet is overspending. UBS held a neutral rating with a $348 price target, saying Alphabet’s valuation is already stretched, and this spending spree might not excite anyone.

Barclays raised its target to $360, noting 48% Cloud growth and stronger Search margins. It said DeepMind costs were exploding alongside capex. Bank of America gave a $370 price, saying AI will push Search monetization higher, and Gemini plus Cloud TPUs are real weapons. They pointed to future events like the Gemini ads launch and Cloud Next Conference on April 22 as key catalysts.

Deutsche Bank raised its target to $390, calling the quarter clean, with revenue up 18% year over year to $114 billion. Citi agreed, moving its target to $390 as well, acknowledging the hit to free cash flow, but backing the investment based on AI demand.

JPMorgan upped theirs to $395, saying returns are showing across Gemini, Cloud, and Search, and that Alphabet has a massive multi-year backlog. Finally, Goldman Sachs raised its target to $400, saying the company is still showing strong operating results even with high costs.

The smartest crypto minds already read our newsletter. Want in? Join them.