Alphabet justifies $10b capital expenditure increase in 2025

• Its cloud unit is widely regarded as Alphabet’s key growth engine as the company’s traditional search business matures.

Alphabet Inc., the parent company of Google, has reported robust quarterly sales growth driven largely by soaring demand for artificial intelligence (AI) products.

The surge, however, comes with a significant increase in capital spending requirements. Alphabet now anticipates capital expenditures of $85 billion in 2025, surpassing earlier projections by $10 billion.

While the company’s impressive revenue and profit performance for the second quarter exceeded analyst expectations, the announcement of higher spending initially unsettled investors.

Nevertheless, CEO Sundar Pichai clarified that these investments are essential to meet rapidly expanding customer demand and to maintain a competitive edge in the AI landscape.

The competitive pressure within the AI sector is intense, as industry giants such as Microsoft Corp., Meta Platforms Inc., and startups like OpenAI aggressively ramp up their AI investments.

Analysts said that Alphabet is compelled to keep pace, particularly because emerging AI technologies, including chatbots developed by competitors, pose a potential threat to Google’s flagship search business.

Alphabet’s second-quarter performance was strong across multiple fronts, with sales reaching $81.7 billion, well above the $79.6 billion average analyst forecast.

The growth underscores the enduring strength of Alphabet’s core search advertising business alongside its expanding cloud computing operations.

Accelerating AI portfolio

To support its escalating AI spending, Alphabet is relying heavily on its entrenched advertising revenue and the fast-growing cloud segment.

CEO Pichai emphasised the urgency with which the company’s employees are being tasked to accelerate AI product development, spanning from innovative search enhancements to new cloud tools tailored for diverse customer needs.

 “We are seeing significant demand for our comprehensive AI product portfolio,” Pichai stated, highlighting the company’s strategy to leverage its broad AI capabilities.

Financially, Alphabet’s capital expenditures are expected to continue rising beyond 2025, reflecting

The ongoing necessity to fund AI infrastructure and innovation. This increased spending is also manifesting in heightened research and development costs, which climbed by 16 per cent in part due to more competitive compensation packages.

The intense competition for AI talent is driving up salaries industry-wide, with Meta in particular setting high benchmarks for recruiting researchers in superintelligence.

Alphabet’s recent acquisition of AI coding startup Windsurf for approximately $2.4 billion illustrates the premium placed on securing top talent and advanced technology.

However, monetary incentives alone are not sufficient to attract elite AI researchers. According to Pichai, the foremost talents seek opportunities to engage at the leading edge of technological progress, access substantial computing resources, and collaborate with highly skilled peers.

Gemini still trails ChatGPT

Alphabet believes it remains highly competitive in providing these critical factors, which collectively foster an environment conducive to breakthrough AI advancements.

Alphabet’s cloud computing division continues to demonstrate healthy growth, reporting $13.6 billion in quarterly revenue and $2.83 billion in operating income, both surpassing analyst predictions.

Although Google remains third in market share behind Microsoft and Amazon, its AI capabilities have been pivotal in securing new clients and driving cloud growth.

The cloud unit is widely regarded as Alphabet’s key growth engine as the company’s traditional search business matures. Central to this strategy is Gemini, an AI model being rapidly integrated into Google’s products and targeted at enterprise customers. Despite receiving acclaim for its latest iteration, Gemini still trails OpenAI’s ChatGPT in market adoption.

Pichai expressed his enthusiasm about Google Cloud supplying OpenAI—the company behind the widely impactful ChatGPT—with the essential cloud computing resources necessary for training and deploying its AI models.

Google’s decision to provide cloud infrastructure to OpenAI—an entity perceived as a direct competitor—demonstrates a strategic move aimed at reinforcing Google Cloud’s standing in the AI ecosystem.

Pichai highlighted Google Cloud’s open platform philosophy and its historical support of innovative startups and AI labs, emphasising a commitment to nurturing the broader AI community while simultaneously seizing new commercial opportunities.

Google’s competitive strategy

OpenAI’s reliance on Google Cloud is particularly significant given the constraints it faces in acquiring adequate computational power, notably Nvidia GPUs, essential for AI training and deployment.

Microsoft, OpenAI’s major investor and long-time cloud partner, has encountered supply limitations that have strained their relationship.

Consequently, OpenAI’s engagement with Google Cloud not only alleviates these bottlenecks but also diversifies its cloud service providers. For Google, this translates into a lucrative customer relationship, albeit one that entails risks.

There is an inherent tension in enabling a competitor’s technological advancement that might ultimately disrupt Google Search’s core market.

Furthermore, Google’s success in securing partnerships with other prominent AI labs—such as Anthropic and Safe Superintelligence—underlines its extensive reach and capacity within the AI research community.

Pichai credits this partly to the availability of advanced hardware, including Nvidia GPUs and proprietary TPU chips, which are critical components for AI computations.

On the AI product front, Google has reported encouraging user engagement with services like Gemini, reaching 450 million monthly active users, and AI Overviews, with 2 billion monthly active users. Despite these impressive metrics, the commercial impact and the effect of these AI products on traditional search traffic remain uncertain.

The evolving dynamics between AI-powered interfaces and traditional search paradigms will likely shape Google’s competitive strategy in the coming years.

Advertising revenues also remain a strong component of Alphabet’s earnings. YouTube, the company’s popular video platform, generated $9.8 billion in second-quarter ad revenue, outperforming estimates. This success is attributed to YouTube’s leadership in streaming to living-room devices and its substantial investments in podcast content.

Meanwhile, Alphabet’s “Other Bets” portfolio—which includes futuristic ventures such as the autonomous vehicle project Waymo—reported revenue of $373 million, falling short of expectations and highlighting the ongoing challenges in these experimental areas.