Alphabet shares jumped over 3% in early trading Thursday after the Google parent’s earnings reinforced a key message to investors: while AI investments are rising, so are the returns.
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The tech giant has increased its 2025 capital spending forecast by $10 billion to $85 billion and indicated even greater spending next year, aiming to meet surging cloud demand and remain competitive in Silicon Valley’s intensifying AI race.
Google’s cloud-computing unit posted a nearly 32% surge in second-quarter revenue, beating expectations as investments in its custom chips and Gemini AI model began yielding results.
The strong performance signals positive momentum for competitors Microsoft and Amazon, both of which are ramping up data center investments and operate larger cloud platforms.
“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.
Despite being an early AI pioneer with the invention of the Transformer model the backbone of most modern generative AI Google seemed to lag behind OpenAI and Microsoft last year.
However, it has made a strong comeback in 2025, with AI Mode hitting 100 million monthly users just two months after its broader release, and Gemini now boasting over 450 million monthly users.
Meanwhile, Google’s core advertising business which generates roughly three-quarters of its revenue remains resilient, holding steady despite economic challenges posed by tariffs and global tensions.
Revenue from Google’s ad business rose by a stronger-than-expected 10.4%, a promising signal for ad-reliant rivals like Meta and Snap.
Following the results, at least 27 brokerages raised their price targets for Alphabet stock, lifting the median target to $220 from $200 just a month ago.
However, some analysts cautioned that the company’s increased spending could raise concerns among investors, many of whom have remained cautious this year. So far in 2025, Alphabet shares are up only 0.5%, trailing Microsoft’s 20% gain and Meta’s 22% rise both outperforming despite Alphabet’s ongoing regulatory challenges over alleged monopolistic practices in search and ad-tech.
Alphabet’s 12-month forward price-to-earnings ratio is 18.88, notably lower than Microsoft’s 33.03 and Amazon’s 33.31, based on LSEG data.
“On paper, it has all the right tools to lead in AI – cutting-edge models and massive distribution,” said Matt Britzman, senior equity analyst at 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.”