Alphabet shares fell 3% in after-hours trading despite beating Q4 earnings expectations, driven by investor concern over capital expenditure guidance that nearly doubles year-on-year spending.
The company announced plans to spend $175-185 billion on capital expenditure in 2026, up from approximately $95 billion in 2025. That's roughly 50% above analyst expectations of $119.5 billion. The spending targets data centre infrastructure and chip acquisitions to support AI development.
The market reaction highlights a tension playing out across semiconductor and cloud infrastructure stocks: strong operational results versus questions about sustainable returns on massive capital deployment. This is the digestion period where investors demand proof that capex translates to competitive advantage, not just revenue growth.
Alphabet's financial position supports the aggressive strategy. The company generated $150 billion in operating cash flow, providing capacity to fund infrastructure without excessive debt. That matters in a supply-constrained semiconductor environment where competitors face greater capital constraints.
Google Cloud provided the strongest evidence for the spending thesis. Q4 revenue reached $17.7 billion, up 48% year-over-year and significantly outpacing the expected 38% growth. Cloud operating income more than doubled to $5.31 billion from $2.09 billion. Total Q4 revenue hit $113.83 billion, up 18%.
CEO Sundar Pichai defended the investments: "We're seeing our AI investments and infrastructure drive revenue and growth across the board." The Cloud numbers support that claim. The question is whether this growth rate persists long enough to justify the capital intensity.
The broader context matters. AMD shares tanked 17.3% this week on disappointing guidance. Broadcom and Oracle also retreated. The Nasdaq dropped 1.51%. Investors are rotating out of AI infrastructure plays, questioning valuations and cycle longevity.
Three things to watch: whether Cloud growth rates hold above 40%, how quickly the new infrastructure generates returns, and whether competitors can match this spending without damaging their balance sheets. The capital cycle in semiconductors and cloud infrastructure is accelerating. Not all players have Alphabet's cash position to compete.