Google Bets Big on AI Infrastructure

It’s been an up-and-down week for Google. On Monday, parent Alphabet saw its $23 billion bid for cybersecurity startup Wiz fall apart; on Tuesday, Alphabet posted impressive earnings, though investors balked at news that margins may be hit by AI tech investing later this year. And management acknowledged that Google’s vision of widespread enterprise AI could lag its infrastructure buildout.

First the earnings: Alphabet posted revenues of $80.5 billion, up 15% year-on-year (y/y). Net income was $23.6 billion, up 57% y/y, and earnings per share was $1.89, up 61% y/y. All figures exceeded Wall Street estimates.

Google Services, which includes ads, Android, Chrome, devices, Google Maps, Google Play, Search, and YouTube—everything but cloud—posted $73.9 billion in sales, up 12% y/y. Operating income for Google Services was $29.6 billion, up 27% y/y.

Google Cloud revenues, which include Google Cloud Platform (GCP) sales as well as Google Workspace and other enterprise tools and services, were $10.3 billion, up 29% y/y and representing the first time Cloud has gone over the $10 billion mark. Operating income for Google Cloud was $1.2 billion, up 371% y/y.

The GCP results, while not broken out, were even better than the superset Google Cloud’s. On the earnings call, outgoing Alphabet CFO Ruth Porat (who’s been promoted to president and CIO) cited “significant growth in GCP, which was above growth for Cloud overall and includes an increasing contribution from AI.”

Alphabet Guidance Riles Investors

With all the good news, why did shares fall over 5% in trading today? Guidance calls for margins to be pressed by the company’s investment in AI infrastructure. CFO Porat said on the call:

“However, in the third quarter, operating margins will reflect the impact of both the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure, as well as the increase in Cost of Revenues due to the pull forward of hardware launches into Q3.”

Capex is climbing too: This quarter it was $13 billion, up 91% y/y. And it’s not going down. “Looking ahead, we continue to expect quarterly CapEx throughout the year to be roughly at or above the Q1 CapEx of $12 billion,” said Porat on the call. She said the investment will be primarily in technical infrastructure, “with the largest component for servers, followed by data centers.”

High Hopes for AI

Needless to say, Alphabet is betting big on AI. On one front, the company is applying AI Overviews to Search and enlisting AI agents in ads online. Elsewhere, it’s making progress with customers of its Vertex AI platform and Gemini models. And it’s introduced a new version of its Trillium accelerator chip (or tensor processing unit—TPU) that boasts a 5X increase in peak compute performance per chip and is reportedly 67% more energy-efficient compared to its predecessor. The vendor also said it will add the new NVIDIA Blackwell GPUs to Google Cloud early in 2025.

“Importantly, we are innovating at every layer of the AI stack, from chips to agents and beyond, a huge strength. We are committed to this leadership long-term,” said CEO Sundar Pichai on the earnings call.

But that innovation won’t result in enterprise monetization for awhile, Pichai acknowledged. When asked about the rate of development of AI products, he said on the call:

“On the enterprise side, I think we are at a stage where there are definitely a lot of models. I think roughly the models are all kind of converging towards a sort of base capabilities but I think where the next wave is working is to build solutions on top of it.

“And I think there are pockets, be it coding, be it in customer service, et cetera, where we are seeing some of those use cases seeing traction. But I still think there’s hard work there to completely unlock those.”

A bit later, Pichai said when asked about the progress of AI in the enterprise:

“You are definitely seeing early use cases. But I think we are in this phase where we have to deeply work and make sure on these use cases, on these workflows, we are driving deeper progress and unlocking value, which I’m very bullish will happen. But these things take time.

“But if I were to take a longer-term outlook, I definitely see a big opportunity here. And I think particularly for us, given the extent to which we are investing in AI, our research and infrastructure leadership, all of that translates directly. And so I’m pretty excited about the opportunity space ahead.”

Futuriom Take: Google is building an infrastructure designed to support a vast AI empire. In the process, it could pressure its margins. But management is confident that AI applications will emerge as a transformational force in enterprise IT. The question is whether Google’s timeline will match actual enterprise progress.