Alphabet’s quarter, spending guide, commentary give little reason to change our view on the stock
Shares of Alphabet were under pressure in after-hours trading Tuesday, following the tech giant’s quarterly revenue miss and much higher-than-expected 2025 capital expenditure guidance. Revenue for the fourth quarter ended Dec. 31 climbed 12% year over year to $96.47 billion, short of the $96.56 billion consensus estimate compiled by LSEG. Adjusted earnings-per-share jumped 31% year over year to $2.15, exceeding expected EPS of $2.13. GOOGL 1Y mountain Alphabet 1 year Alphabet stock dropped roughly 7.5% to around $191 on the print. The magnitude of the decline, should it hold by Wednesday’s close, would nearly wipe out the Google parent’s 2025 gains. Bottom line We’re debating whether this management team can do better or whether we’re looking at a value trap. The question about a value trap, in this case, would be if Alphabet’s artificial intelligence revenue growth were to be offset by slower-than-expected growth, or even a decline, in the company’s bread and butter search business. This threat is very real due to thousands of cuts being delivered by competing large language models (LLMs), and Google’s own, delivering answers instead of search results. For the time being, search and other, the primary revenue source, and YouTube ads both outpaced expectations. However, when you report earnings with a stock trading near all-time highs, you can’t afford to miss on sales, and you certainly can’t afford to miss in a segment as crucial to the long-term growth outlook as Google Cloud. Both happened. Another factor weighing on shares but working to the benefit of fellow Club name Broadcom was Alphabet’s forecast to spend about $75 billion on capex this year, far above the $58.8 billion the Street was expecting. Shares of Broadcom, which helps Google design custom AI chips, rose more than 3.5% in after-hours trading. Alphabet’s capex guide was also a relief for Nvidia investors concerned about big tech companies scaling back AI chip purchases after Chinese startup DeepSeek went viral last week with claims of a more efficient and lower-cost AI model. Club stock Nvidia was flat after hours after bouncing 1.7% in the regular session. Nvidia was crushed by the DeepSeek news last Monday and has been trending downward since. Last week, Club names Meta Platforms and Microsoft also kept capex at high levels. We’ll be looking ahead to Thursday evening to see if Amazon , also a Club holding, follows suit. Alphabet Why we own it : Alphabet’s Google Search remains an invaluable tool for advertisers. YouTube continues to gain screen time with viewers and stands to grow even more as the company adds more live pro sports. While we have concerns about management’s consistency, we still believe Alphabet to be a leader in artificial intelligence with multiple opportunities to monetize investments in the field. Competitors : Amazon , Microsoft and Meta Platforms Weight in portfolio : 2.25% Most recent buy : March 4, 2022 Initiated : July 22, 2014 The trouble with Alphabet’s stock in the near term is valuation. It’s too cheap at 21 times forward earnings, where it was trading after hours, to get overly bearish. After all, you’re getting double-digit sales and earnings growth with the potential upside provided by artificial intelligence opportunities such as further cloud growth and Waymo robotaxis that keep expanding to additional cities. Waymo is housed in the company’s other bets segment. The management team, however, has not been consistent enough to be all that bullish. That’s been the case for a few quarters now, but it has not resulted in a miss on headline sales or earnings, since the quarter ending December 2022. As a result, we have no choice but to maintain our 2 rating until management is better able to meet expectations consistently — or at the very least, manage them. The other frustrating part is that management doesn’t seem capable of addressing or even acknowledging the lack of consistency, spending most of the post-earnings call telling investors how great things are. Weighing valuation and consistency, we’re choosing for the moment to maintain our price target of $210 per share. While profitability did come in better than expected, the sales miss is likely to raise questions about competition, especially given how strong last week’s quarterly results were from Meta, the other online advertising juggernaut. Is Meta’s ad platform more insulated from the adoption of large language models? Are users looking to Meta.ai instead of Google Search? Is Google’s own Gemini LLM pressuring its search business? Contrasting Alphabet’s results with last week’s financials from Club holding Apple . The latter has some real near-term overhangs such as a slower-than-expected AI rollout, a China trade war, and a higher valuation. However, Apple CEO Tim Cook and his management team are able to deliver on expectations or at the very least, manage them effectively. Sure, Apple shares are off their highs, but investors are still willing to pay around 30 times forward earnings for it. Alphabet, meanwhile, should be absolutely crushing it right now as there seems to be no limit to demand for AI — just ask Meta CEO Mark Zuckerberg or Palantir CEO Alex Karp — yet, the team just can’t seem to string together three solid quarters in a row. Unfortunately, we saw nothing in the financials, nor heard anything on the post-earnings conference call to change our unenthusiastic view of Alphabet that Jim Cramer shared with Club members during the January Monthly Meeting . Jim said last month: “I do not have a specific catalyst for Alphabet. I do like Waymo, think it’s worth a lot but don’t know how to monetize it. YouTube is the greatest medium for ads ever invented. Search remains strong, I struggle to figure out how it lives [when LLMs are just getting better and better]. Right now, I think Alphabet levitating, only because we are in a huge bull market can I justify owning the stock. … Too much fear of missing out and not enough catalyst, I’d say. This might be the year where we bite the bullet in the long-standing romance that we’ve had with Google. Maybe we have to move on.” Alphabet stock is likely to be a penalty box name with limited upside until a clear catalyst presents itself. Commentary While missing expectations for the quarter, Google Cloud revenue rose 30% year over year to just about $12 billion. Segment profit soared 142% to a better-than-expected $2.1 billion. The issue is investors are focused more on sales growth than profit, especially given the amount of money being spent to build out AI-ready cloud infrastructure. The profit being generated by the cloud segment isn’t material enough to look past the sales miss. CFO Anat Ashkenazi said on the call that given “revenues are correlated with the timing of deployment of new capacity, we could see variability in cloud revenue growth rates depending on when new capacity comes online during 2025.” YouTube continued to show solid momentum, with CEO Sundar Pichai saying on the call, “Nielsen data shows YouTube continues to be No. 1 in streaming watch time in the U.S., with our share of streaming now at a record high on Election Day alone, over 45 million viewers across the U.S. watched election-related content on YouTube. Our early investment in podcasts is paying off. We integrated podcasts into the core YouTube experience, particularly with video. We are now the most frequently used service for consuming podcasts in the U.S., according to a recent Edison report.” U.S. election advertising was key to YouTube ad growth in the quarter. Looking at Google Search and Other , alongside the Google Network ad business, Ashkenazi noted a shift from Google Network properties to search and other does help with profitability as the network segment comes with “much higher” traffic acquisition costs. She added, “The robust performance of search was once again broad-based across verticals led by the financial services vertical. Due to strength in insurance, followed by retail.” Google subscriptions, platforms, and devices came up short, with Ashkenazi noting that while subscription revenue was up, it was “partially offset by the shift in the timing of the launch of our Made by Google devices to the third quarter.” She added, “Compared with the fourth quarter in 2023. We continue to have significant growth in our subscription products, primarily due to an increase in the number of paid subscribers across YouTube TV, YouTube Music Premium, and Google One.” Capital returns Alphabet returned $15.55 billion to investors via share repurchases in the fourth quarter, though the company did pay out $5.8 billion in stock-based compensation. The team also returned another $2.4 billion via dividends during the quarter. The company exited the quarter with $95.657 billion in cash, cash equivalents, and marketable securities on its balance sheet. (Jim Cramer’s Charitable Trust is long GOOGL, AAPL, META, MSFT, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Shares of Alphabet were under pressure in after-hours trading Tuesday, following the tech giant’s quarterly revenue miss and much higher-than-expected 2025 capital expenditure guidance.