Breaking down what’s behind Alphabet’s recent struggles and what it means for investors

Alphabet Inc. (NASDAQ:GOOG), the parent company of Google, has long been a titan in the tech sector. With its sprawling empire—from Google Search and YouTube to Google Cloud and ambitious “Other Bets”—it commands a massive presence in multiple industries. 

However, recent performance and strategic choices have landed Alphabet in the spotlight for reasons beyond its usual market dominance. Michael P Jones, senior financial analyst from Zxperts, dives into the details behind Alphabet’s unexpected stumble in early 2025 and what it means for investors looking at large-cap tech stocks.

A Quarter That Caught Investors Off Guard

The first quarter of 2025 saw a market correction after two years of strong gains in US equities. Alphabet’s stock closed at $160.89 per share on May 13, 2025, marking a 6.42% drop over the last 52 weeks. 

Despite delivering solid revenue growth of 12%, reaching $90.2 billion, and improving margins in key segments like advertising and cloud services, Alphabet’s stock lagged behind many peers.

The London Company Large Cap Strategy, a respected investment management group, highlighted Alphabet as a bottom performer in their recent Q1 report. While acknowledging the company’s strengths—strong balance sheet, significant market share, and high returns on invested capital—their concerns centered on two main issues: higher-than-expected capital expenditures (capex) and rising competition in AI-driven search alternatives.

The Capex Conundrum: Investing for Tomorrow or Dragging Today?

Capital expenditures (capex) represent investments in physical assets or infrastructure that support long-term growth. Alphabet’s recent capex guidance surprised many. 

The company is doubling down on expanding data centers, artificial intelligence capabilities, and quantum computing projects—initiatives that require heavy upfront spending but offer future potential.

While this level of investment signals ambition, it also weighs on short-term profitability. For investors who prioritize immediate earnings growth or dividend payouts, such heavy spending can be a red flag.

Michael P Jones explains:
“Alphabet’s spending spree shows confidence in future tech leadership but pressures current earnings. The market tends to penalize companies when capex grows faster than revenue, especially if near-term returns aren’t clear.”

The balance here is tricky. Investors must weigh the promise of cutting-edge technologies against the cost drag on today’s bottom line. This dynamic partly explains Alphabet’s stock softness despite strong operational results.

AI Search Alternatives: A New Competitive Front

Google’s dominance in search is almost legendary. But emerging AI-powered search platforms are shifting the playing field. Alternatives that integrate generative AI and conversational interfaces appeal to users seeking more intuitive and context-aware experiences.

This shift threatens Google’s traditional search advertising revenue, which remains a significant profit driver. Alphabet’s cautious approach in pivoting to AI search has opened the door for competitors to chip away at its moat.

Despite Google’s aggressive push into AI research and product innovation, investors are wary that this transition may temporarily affect market share or margins.

Alphabet’s Cloud: A Bright Spot

One of Alphabet’s fastest-growing segments is Google Cloud. It recorded double-digit revenue growth in Q1 2025, reflecting expanding enterprise adoption of its cloud infrastructure and productivity tools.

Cloud business margins improved, signaling that Alphabet is closing the gap with leaders like Amazon Web Services and Microsoft Azure. This growth is crucial, given that cloud services tend to generate more predictable, recurring revenue compared to ad sales.

However, cloud profitability improvements can be uneven as the company continues to invest heavily in infrastructure to meet demand.

What Investors Should Watch Next

• Capex Trends: Continued high spending without a clear path to margin improvement could pressure the stock. Conversely, signs of efficient capital allocation may restore confidence.
• AI Product Success: Alphabet’s ability to integrate AI into its search and advertising platforms will be a key driver of future revenue growth.
• Cloud Market Share: Gains in cloud adoption and profitability will help stabilize earnings and diversify revenue sources.
• Regulatory Environment: Ongoing scrutiny of big tech firms can impact Alphabet’s operational freedom and costs.

A Cautious Outlook with Long-Term Potential

Alphabet remains a giant with deep pockets and the ability to pivot strategically. Its investments in AI, cloud, and quantum computing position it for potential breakthroughs that few competitors can match. Yet, the short-term challenges from high capital spending and competitive pressures mean investors should approach with measured expectations.

Michael P Jones sums up:
“Alphabet’s stock performance reflects a transition phase. For those with a long horizon, the company’s investments could pay off handsomely. But patience is required as the market digests these shifts.”

Final Thoughts: Positioning in a Shifting Market

For investors, Alphabet’s story is about balancing innovation-driven growth against near-term costs and risks. The company’s core strengths—scale, cash flow, and talent—remain intact. Yet, the emerging AI landscape and evolving market dynamics call for more nuanced analysis than ever before.

Watching how Alphabet manages its capital expenditures and navigates the AI search battle will provide important signals. Those who stay informed and flexible can benefit from the company’s potential upside while mitigating exposure during this transitional phase.

For deeper insights and guidance on navigating large-cap tech stocks like Alphabet, consider the perspectives shared by Michael P Jones, Senior Financial Analyst at Zxperts.