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Shares sink 6% as Google parent Alphabet disappoints with ad revenue, while CapEx rises.

On Tuesday, Alphabet (GOOGL.O) disappointed investors as its holiday-season advertising sales fell short of expectations, causing a 6% drop in its shares during after-hours trading. Despite a rise in fourth-quarter ad revenue to $65.5 billion from $59.0 billion the previous year, it missed analysts’ average expectation of $66.1 billion.

The company attributed this shortfall to increased competition for ad budgets from platforms like Facebook, Instagram, TikTok, and, despite retail sales showing promise. Analysts like Thomas Monteiro from linked Alphabet’s ad revenue woes to global uncertainties regarding interest rate cuts by central banks.

Additionally, Alphabet faces stiff competition in the AI sector from industry players like Microsoft and OpenAI, the creator of ChatGPT. While Google Cloud exceeded Wall Street targets, Microsoft’s Azure experienced faster growth in the same period.

To support its AI initiatives, Alphabet’s capital expenditure surged to $11 billion, the highest in years. This investment includes bolstering servers, data centers, and research. Chief Financial Officer Ruth Porat noted that capital expenditures would be notably higher this year than in 2023, signaling Alphabet’s commitment to AI development.

In response to rising costs, Alphabet is trimming non-priority projects and expects $700 million in severance-related expenses in the first quarter. Despite efforts to innovate with models like Gemini and investments in AI startup Anthropic, Alphabet faces challenges in boosting advertising revenue amidst geopolitical and economic uncertainties.

During the earnings call, CEO Sundar Pichai highlighted the progress of AI across Alphabet’s business units, emphasizing its ability to enhance user experiences. The competition with Microsoft intensifies as both companies integrate AI into their cloud offerings.

While Google Cloud’s revenue growth rebounded, it fell short of the previous year’s pace. Microsoft’s Azure reported a 30% growth in sales, underscoring the fierce competition in the cloud market.

Overall, Alphabet’s revenue for the fourth quarter reached $86.3 billion, slightly surpassing estimates. As Alphabet navigates challenges in the advertising landscape and invests heavily in AI, the company remains focused on driving innovation and growth in its core business areas.

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