Alphabet Earnings: AI Spending Surges

Wall Street is closely monitoring Alphabet's upcoming financial report. The tech giant will release its third-quarter results after the market closes on Wednesday.

Investors are weighing whether the company's massive artificial intelligence investments are generating sufficient returns. LSEG data shows analysts expect earnings per share to hit $3.02 on revenue of $128.2 billion. That figure marks a 25% year-over-year increase and represents the fastest growth rate for any period since 2021.

The report arrives amid heightened concern over infrastructure costs. Alphabet shares dropped in five of the last six trading sessions through Tuesday. The stock is down approximately 7% in October. In July, the company raised its full-year capital expenditure forecast to between $195 billion and $205 billion. This marked an increase from earlier guidance of $190 billion and resulted in the company's first negative free cash flow.

FactSet data indicates analysts anticipate third-quarter capital spending to rise 130% from a year earlier to $55.2 billion. Projections suggest annual capex will exceed $200 billion this year and surpass $300 billion in 2027. Forecasters also expect a negative free cash flow of $2.27 billion for the current quarter, with the shortfall widening over the next four quarters.

Strong performance in the cloud division is offsetting some of the spending concerns. Cloud revenue is projected to grow 90% to $28.7 billion as Google captures market share from Amazon Web Services and Microsoft Azure. Microsoft will report its own earnings on Wednesday, while Amazon follows on Thursday. Google is expanding its Gemini models into enterprise offerings and selling more custom tensor processing units that compete with Nvidia's graphics processing units.

Core search business faces pressure from competitors like OpenAI and Anthropic, along with a growing number of new AI agents. Citizens analysts, who maintain a buy recommendation, noted that Google is well-positioned in AI but cautioned about execution risks. They stated that competition in Search is increasing and requires another strategic pivot.

Company executives will speak with analysts on a conference call scheduled for 4:30 p.m. ET on Wednesday.