What Happened?
Shares of online advertising giant Alphabet (NASDAQ:GOOGL) fell 8.7% in the pre-market session after the company reported underwhelming fourth-quarter results. Its total revenue was in line and its Google Cloud revenue missed, spooking some investors who had high expectations. Given the secular trends surrounding Google Cloud along with its long-term profit margin potential, it is increasingly a sharp focus of investors and the market.
We note that Microsoft's Azure division also posted worse-than-anticipated results, signaling the market was overly optimistic about cloud computing for Q4.
On the brighter side, advertising revenue slightly exceeded expectations, driven by strong contributions from both Search and YouTube. It was also encouraging to see Alphabet beat analysts' operating income expectations this quarter.
In AI, the company earmarked $75 billion for capital expenditures in 2025—well ahead of Wall Street's estimates. It also rolled out its latest AI model, Gemini 2.0, to the public, aiming to expand its reach and stay competitive with rivals.
Zooming out, we think this was a mixed quarter with areas of underperformance weighing on shares that had made 52-week highs right before this earnings announcement.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Alphabet? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Alphabet’s shares are very volatile and have had 27 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 9 days ago when the stock dropped 4.6% as stocks heavily tied to the AI market took a hit after Chinese artificial intelligence startup DeepSeek released a new large language model (DeepSeek-R1) that ranks competitively on key global benchmarks (coding competitions, math evaluations), uses less advanced semiconductor chips, costs significantly less to build (at $5.5 million - excluding non-compute costs), and has already achieved strong adoption after topping the iPhone App Store for AI apps.
Notably, the company has also open-sourced this model, a move that may make it harder for rivals to justify huge upfront expenditures on hardware, software, and expertise to develop similar systems. Speaking at the World Economic Forum in Davos, Switzerland, Microsoft CEO Satya Nadella praised DeepSeek's efforts, calling the new model "super impressive" for its open-source design, efficient inference-time computing, and high compute efficiency. "We should take the developments out of China very, very seriously," he added.
Nadella's comments suggest that upstarts like DeepSeek could reshape the competitive landscape of AI. DeepSeek's announcement disrupts long-held assumptions in key ways: 1) It undercuts the narrative that bigger budgets and access to top-tier chips are the only ways forward for AI development. 2) By using less advanced hardware, DeepSeek opens the door for innovators who face high chip costs or export restrictions, reaffirming they can still compete. 3.) The model's success questions the growth narrative of chipmakers like Nvidia—whose soaring valuations depend on the demand for cutting-edge, high-performance hardware.
Overall, DeepSeek's model demonstrates that AI innovation is no longer a race fueled solely by how much you spend, but rather by how resourceful you can be with what you have.
Alphabet is up 0.7% since the beginning of the year, and at $190.84 per share, it is trading close to its 52-week high of $206.38 from February 2025. Investors who bought $1,000 worth of Alphabet’s shares 5 years ago would now be looking at an investment worth $2,639.
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