Figurines with computers and smartphones are seen in front of Alphabet logo in this illustration taken, February 19, 2024. REUTERS/Dado Ruvic/Illustration Purchase Licensing Rights, opens new tab
July 24 (Reuters) - Alphabet shares
(GOOGL.O), opens new tabrose nearly 3% before the bell on Thursday as the Google parent's earnings underscored a key message to investors: AI spending is climbing, but so are the returns.
The tech giant has raised its 2025 capital spending forecast by $10 billion to $85 billion and signaled even higher outlay next year, stepping up efforts to meet soaring cloud demand and stay competitive in Silicon Valley’s escalating AI race.
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Its cloud-computing unit delivered an almost 32% jump in second-quarter revenue, surpassing expectations, as investments in in-house chips and the Gemini AI model began to pay off.
The results bode well for rivals Microsoft
(MSFT.O), opens new taband Amazon.com
(AMZN.O), opens new tab, both of which have been stepping up data center investments and operate larger cloud businesses.
"Google came back fighting this quarter," said Bernstein analyst Mark Shmulik. "Investors have long been clamoring for Google to get more ‘aggressive’ in the AI race," he added.
An early AI pioneer with its invention of the Transformer model - the foundation of most modern generative AI - Google appeared to fall behind OpenAI and Microsoft last year.
But it has rebounded this year, with AI Mode reaching 100 million monthly users just two months into its wider rollout, and Gemini surpassing 450 million monthly users.
Its ad business, which accounts for about three-quarters of its sales, also continues to fare well in the face of economic uncertainty wrought by tariffs and geopolitical tensions.
Revenue in the business a rose better-than-expected 10.4%, a positive sign for rivals such as Meta
(META.O), opens new taband Snap
(SNAP.N), opens new tabthat rely on digital ads for most of their revenue.
At least 17 brokerages raised their price targets on Google stock after the results, taking the median target to $210.
Still, some analysts warned the higher spending may draw fresh scrutiny from investors, who have largely stayed on the sidelines this year. Alphabet shares are up just 0.5% in 2025, trailing Microsoft's 20% increase and 21% rise in Meta stock, also held back by regulatory battles that are looking to break its illegal monopoly in the search and the ad-tech market.
Alphabet's 12-month forward price-to-earnings ratio stands at 18.88, trailing Microsoft's
(MSFT.O), opens new tab33.03 and Amazon's
(AMZN.O), opens new tab33.31, according to data compiled by LSEG.
"On paper, it has all the right tools to lead in AI - cutting-edge models and massive distribution," said Matt Britzman, senior equity analyst, Hargreaves Lansdown.
"That said, until there's more confidence AI integration won’t cannibalise core search revenue, and some clarity around ongoing legal battles, there’s enough uncertainty to cap near-term upside."
Reporting by Kanchana Chakravarty in Bengaluru and Danilo Masoni in Milan; Editing by Samuel Indyk
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