Alphabet GOOGL shares fell 2.2% to around $329 on Wednesday midday even as the broader US stock market moved higher, putting the Google parent under pressure ahead of its third-quarter earnings report scheduled for October 28.
The decline contrasted with a 1.15% gain in the technology-heavy Nasdaq Composite, while all three major US indexes traded in positive territory.
With Alphabet’s results approaching, investors are weighing the company’s growth prospects against the rising cost of its artificial intelligence investments amid heating competition.
Analysts’ Alphabet’s outlook
KeyBanc analyst Justin Patterson on Monday maintained an Overweight rating on Alphabet but lowered his 12-month price target to $410 from $435.
The firm cited reduced earnings estimates for Google Services and a lower valuation multiple for the contribution of custom Tensor Processing Units (TPUs) to Google Cloud.
KeyBanc also cautioned that Wall Street’s broader earnings expectations for Alphabet appeared too optimistic and suggested the stock could remain rangebound until estimates become more realistic.
However, KeyBanc remains bullish on the stock in the long run, much like most analysts.
Truist Securities reiterated its Buy rating and $420 price target on Wednesday, although the endorsement did little to support the shares during the session.
BMO Capital recently raised its price target to $480 while maintaining an Outperform rating, pointing to strong expectations for Google Cloud.
JPMorgan analyst Doug Anmuth also raised his price target to $425 from $420 on October 15, citing rapid growth in Google Cloud and strong enterprise demand for Google’s custom TPUs.
Alphabet continues to benefit from demand for cloud computing and AI infrastructure, but analysts are also scrutinising how much of that growth is already reflected in its share price.
AI investment and cloud growth in focus
Alphabet expects capital expenditure of $195 billion-$205 billion this year, with a substantial portion directed toward expanding its AI infrastructure.
The scale of that spending has become an important consideration for investors as technology companies race to build data centres and computing capacity.
Google Cloud has delivered strong growth, with second-quarter revenue surging 82% to $24.8 billion. Its contracted backlog also reached nearly $514 billion, indicating substantial demand for future services.
However, CEO Sundar Pichai has acknowledged on the Big Technology Podcast that Google’s AI ambitions can affect the cloud business’s ability to serve customers in the short term.
“Our cloud business is at any given moment in time forgoing short-term revenues because we are making compute trade-offs to support frontier AI development.”
Sundar Pichai
The comments highlight the balancing act Alphabet faces as it allocates computing resources between developing advanced AI systems and meeting customer demand for cloud services.
Google Cloud outage adds another concern
Alphabet also faced questions following a power-related disruption at a Google Cloud data centre near London on Tuesday, which caused significant service failures affecting several UK banks.
Google said its cloud services experienced an outage “due to a power event”.
Alphabet’s October 28 earnings report will offer a closer look at cloud growth, AI-related spending and the financial outlook for its core services business.
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