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Alphabet Crushed Cloud Expectations, But the AI Bills Are Coming Due
Key Points
Alphabet shares tumbled more than 11% after the tech giant posted its first bottom-line earnings miss since late 2022.
A non-operating unrealized loss on the company's SpaceX equity stake and an EU antitrust fine amplified the quarterly earnings shortfall.
Surging data center investments are beginning to hit the income statement as rising depreciation and amortization expenses.
Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) shares tumbled more than 11% on Thursday, plunging toward $287 and marking one of the steepest single-day sell-offs in the company's history. As of 11:50 a.m. ET, the Class A stock (the one with votes) is down 11.8%, and the Google parent has lost $410 billion of market value.
The correction followed Alphabet's third-quarter report, which delivered the tech giant's first bottom-line earnings miss against Wall Street consensus since the last quarter of 2022.
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Unpacking the first earnings miss in nearly four years
Let's not beat around the bush. Alphabet missed the Street's bottom-line consensus, posting earnings of $2.12 per share against expectations near $3.02. But it's fair to consider the reasons before hitting the "sell" button.
The shortfall was amplified by an $8.2 billion non-operating, unrealized loss from a decline in the value of Alphabet's equity stake in Space Exploration Technologies (NASDAQ:SPCX), alongside a $5.2 billion cash payment for an EU antitrust fine.
Keep in mind that Alphabet famously doesn't issue revenue and earnings guidance, leaving analysts to develop their own financial models. It's more guesswork than usual.
In this light, the miss looks more like an accounting paper-cut than a broken business model. After all, Google Cloud revenues more than doubled year-over-year, and search queries posted their largest volume growth in five years.
Image source: Alphabet.
A half-trillion-dollar backlog proves the AI demand is real
The real albatross is Alphabet's beastly capital expenses. The company spent $51.4 billion in capex this quarter alone, resulting in a free cash flow burn of $9.1 billion. Management is holding firm on its full-year spending guide of $195 billion to $205 billion. Naturally, this heavy lifting is starting to show up on the income statement as rising depreciation and amortization (D&A).
That explains why the stock's trailing P/E is an affordable 15.0 while the forward multiple creeps up near 19.0 -- still reasonable but higher than the current ratio. The market is pricing in tomorrow's D&A hangover today.
Here is the irony: Google Cloud's backlog swelled to $561 billion. Customers are lining up around the block for AI compute, TPU systems, and Gemini enterprise seats. Management isn't guessing; they are scrambling to build capacity for confirmed demand.
For long-term shareholders willing to absorb near-term margin compression, the core business remains a cash-generating engine. The costly AI infrastructure will keep writing Alphabet's headlines anyway.
Anders Bylund has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.