Alphabet Stock Dips Amid Rising AI Spending and Near-Miss Results

Alphabet shares declined in after-hours trading Wednesday after the Google parent reported second-quarter results that missed some expectations. While artificial intelligence (AI) adoption is driving growth, it is also significantly increasing capital expenditures. The company reported revenue of $119.8 billion, up 24% year over year, surpassing analyst expectations. Earnings per share (EPS) also came in higher than forecast, but this figure included a substantial $99 billion gain from equity investments in SpaceX and Anthropic. Excluding this gain, operational earnings were closer to $2.85 per share, suggesting a miss on the bottom line for analysts.

Concerns over escalating AI spending are weighing on the market. Alphabet increased its capital expenditure outlook for 2026 to between $195 billion and $205 billion, a further upward revision from its previous guidance. While this increased spending is intended to meet demand for AI offerings, it arrives at a time when the company's quarterly free cash flow has turned negative. Management also reaffirmed that capital expenditures would "increase significantly in 2027."

Further pressure came from Google Search revenue, which fell short of expectations. Despite a robust year-over-year growth of nearly 17%, this shortfall in Alphabet's most critical segment has raised questions about the monetization of AI integrated into search results. CEO Sundar Pichai, however, noted that AI features like "AI Overviews" and "AI Mode" are increasing search query volume and driving billions of clicks to websites weekly.

The stock's decline from its May peak is also attributed to ongoing worries about AI costs, a $85 billion funding effort announced in June, and the departure of AI researchers to rivals. Despite these imperfections, Alphabet's AI adoption trends appear to be gaining traction.