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Alphabet is giving investors an inch and taking a yard. The parent of search giant Google reported second-quarter earnings on Wednesday that comfortably outpaced what analysts expected, and said its prodigious investment is creating visible results. So it is spending more — much more. Expect this to set the tone for the next phase of Silicon Valley’s AI race.
Parent company Alphabet reported 14 per cent revenue growth for the three months ending in June, including a 12 per cent increase in search revenue, and 32 per cent in cloud computing. All comforting numbers for investors who might have feared that economic weakness, or the impact of tariffs on advertisers, could be weighing on growth.
Google’s future, however, hangs on bigger, and vaguer, considerations. The big question is what effect chief executive Sundar Pichai’s massive spending plans will have on its AI products, what effect those products will have on its users, and what their response will do to revenue. There are a lot of variables; mostly, the answers seem to be encouraging.
Consider AI Overviews, the algorithm-generated blurbs that often now appear front and centre when users ask questions. Fears that these would reduce the value of search-adjacent ads haven’t come to pass. On the contrary, Google says AI Overviews are driving 10 per cent more queries in searches where they appear and haven’t dented revenue. Paid clicks were up 4 per cent year on year, the company said in a call with analysts on Wednesday.
But as AI yields more, it costs more. Google’s capital expenditure on data centres and such trappings this year will now be about $85bn, versus its prior estimate of $75bn. That’s almost quadruple what the company spent in 2020, when AI was a glimmer in Silicon Valley’s eye. It’s also 22 per cent of the company’s expected revenue this year, according to LSEG, the highest annual level since 2006.
In reality, the company can’t do otherwise. Rivals like Meta Platforms and OpenAI are cash rich and investing hand over fist to win the AI arms race. As well as data centres, there are devices to think about: Meta is ahead in the race to produce AI-powered glasses, and OpenAI is cooking up a new gadget with former Apple design tsar Jony Ive. Google, for its part, has inked a fledgling partnership with eyewear-maker Warby Parker.
Pichar says Google’s mountainous investments are already delivering value and pleasing customers. Asked by analysts what that means in terms of actual financial returns on Wednesday, he equivocated. So, usually, do his peers, who will probably now follow with capital-expenditure bumps of their own. Google hasn’t yet proven all this investment is worth it. But it has done enough to ensure the money-go-round keeps spinning.
john.foley@ft.com