Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock tumbled 7.4% through 11:20 a.m. ET Thursday despite absolutely steamrolling analyst forecasts for Q2 earnings. Expected to earn just $2.88 per share on $116.5 billion in sales, Alphabet reported profits of $9.11, and sales of $119.8 billion — both well ahead of expectations.
So why is Alphabet stock crashing in response?
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Alphabet Q2 earnings
Revenue ran ahead 24% year over year , led by Google Cloud growth of 84%. Google Services revenues were up only 15%, however, with Google Search up 17%, and YouTube Ads up 13%. Earnings roughly tripled year over year.
CEO Sundar Pichai credited “AI infrastructure and AI solutions” in the company’s Cloud business for the performance. It’s no surprise, therefore, that Alphabet plans to double down on what’s working, and management says it will increase capital investment in AI to somewhere between $195 billion and $205 billion this year (about $15 billion beyond previous predictions) — and then spend even more hiring AI computing capacity from third parties.
And that didn’t please investors one bit.
What it means for Alphabet stock
Alphabet’s tremendous cash outlays for AI may be delivering the revenue and GAAP profit growth investors like to see, but they’re devastating the company’s cash flow statement, which showed $5.8 billion in cash burn in Q2 — versus $5.3 billion in positive FCF a year ago.
The “good” news is that if Alphabet invests “only” $205 billion in building out its AI business this year, then forecasts for $210 billion in cash from operations will return the company to about $5 billion in positive FCF by the end of the year.
The bad news: GAAP profit is expected to be $225 billion this year. And almost none of that will be backed up by real free cash flow.
Caveat investor.
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