What worried investors about Alphabet
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Alphabet shares slumped Wednesday after the search giant and AI power player reported results that were, at first glance, pretty darn strong.
Why it matters: Alphabet is the first of the hyperscalers to report results this earnings season.
- The stock reaction could reflect investors' more cautious posture toward the AI narrative that has dominated the market in recent years.
The big picture: Alphabet's second-quarter results were better than what Wall Street analysts expected for revenue and earnings per share, as well as some other metrics.
Yes, but: Its stock still slid after hours.
Reality check: There was no clear takeaway on exactly what investors didn't love. Here are a few guesses.
- Alphabet raised guidance for capital expenditures to between $195 billion and $205 billion for this year, up from previous guidance of $180 billion to $190 billion. (Wall Street was expecting $187.1 billion, according to FactSet.)
- Its operating margin — a measure of how profitable a company's core business is — rose 1.6 percentage points, to 34%, compared with the quarter a year ago. That's good. But it's also down from the first quarter, doing little to ease concerns about the profitability of recent AI investments.
- And finally, there's the striking sight of Alphabet — née Google — one of the most cash-generative entities in the history of American capitalism, posting a quarter of negative free cash flow, reflecting the impact of the company's massive capital expenditures. That includes almost $45 billion in Q2, double what it spent in the same quarter the previous year.
- According to FactSet data, that's the first time the company has recorded a quarter of negative free cash flow — meaning it spent more than the business generated — since then-Google went public back in 2004.
Stunning stat: Alphabet's net income gain was overwhelmingly a result of an unrealized investment gain on equity securities worth $99 billion. (The company didn't detail what securities led to the gain, but it was known to have been an early investor in SpaceX back in 2015.)
The bottom line: The numbers were good. But they weren't spectacular enough to ease the worries about how all this AI spending will ultimately work out.
