Investing.com - Google-parent Alphabet has said that capital spending will be "notably larger" in 2024 versus the prior year, as the company pushes to build out its artificial intelligence capabilities to enhance performance at its key advertising and cloud services units.
Finance chief Ruth Porat said that the group sees "extraordinary" potential for the applications of AI for users, adding that the technology offers "long-term growth opportunities." In particular, Alphabet is targeting the launch of an advanced upgrade to its generative AI chatbot, Bard, later this year.
The comments come as Alphabet reported weaker-than-anticipated advertising growth in the fourth quarter, although strength at its cloud business helped revenue and profit during the period top Wall Street estimates. Shares in Alphabet (NASDAQ:GOOGL) fell in premarket trading on Tuesday.
Advertising revenue climbed 11% from a year earlier, to $65.52B, though that was just shy of estimates of $65.8B. Ad sales from YouTube climbed by 20% to $9.2 billion.
Advertising, a major pillar of Alphabet's total revenue, has been weighed down recently by clients reining in spending in response to the Federal Reserve's aggressive interest rate hiking campaign. However, these pressures have started to abate thanks to hopes that the Fed's tightening cycle may have peaked.
Alphabet reported earnings per share (EPS) of $1.64 on revenue of $86.31 billion, buoyed in large part by 26% growth at Google's cloud services segment. Analysts polled by Investing.com had anticipated EPS of $1.59 on revenue of $85.23B.
Alphabet peer Microsoft (NASDAQ:MSFT) also posted solid quarterly returns after the closing bell on Tuesday. However, Wall Street's tepid reaction to both of the returns indicated that doubts remain over whether they can maintain the soaring spending levels needed to deliver generative AI.
"In the larger picture, the trend for this earnings season is clear: the market wants to see who has enough spending power to dominate the innovation war expected to play out as soon as monetary conditions improve," said Thomas Monteiro, Senior Analyst at Investing.com.
"In this case, more than actual [earnings per share], investors want to see improving margins and free cash flows so they can understand that the company will have a shot in the AI arms race."
Yasin Ebrahim contributed to this report.