Alphabet’s (GOOGL.O) stock dropped more than 3% on Wednesday due to concerns that its increasing investments in AI infrastructure could impact profit margins and the challenges faced by YouTube in securing ad revenue.
In the second quarter, the Google parent’s capital expenditure surged to $13.2 billion, exceeding expectations, as it invests heavily in AI infrastructure to support generative AI services and compete with Microsoft (MSFT.O). Despite cost-cutting measures, including layoffs, analysts warn that higher hiring costs and an early Pixel launch might affect margins in the third quarter.
YouTube is also contending with tough year-over-year comparisons and fierce competition in the online ad market from companies like Amazon.com (AMZN.O). YouTube’s ad sales grew by 13% in Q2, a slowdown from the nearly 21% increase in Q1.
“Management appeared quite cautious about the outlook for the second half of the year,” noted Bernstein analysts. “This could either be a strategy to set a low bar for the new CFO or an indication of a challenging period ahead for digital advertising, marked by slowing growth and rising costs.”
