Alphabet’s earnings impressed. Its spending plans did not

Google’s parent delivered a strong end to 2025, beating forecasts on profit, revenue and cloud growth. Yet the shares fell in after-hours trading. For UK investors holding Alphabet Inc (NASDAQ:GOOG) via tech funds, ETFs, SIPPs and ISAs, the message is clear: this was a good quarter, but an uncomfortable turning point.

Strong numbers, no victory lap

On paper, the quarter looked hard to fault. Alphabet posted $34.5 billion in profit, revenues of $113.8 billion and earnings per share well ahead of expectations. Annual revenue passed $400 billion for the first time, reinforcing Alphabet’s position as one of the most powerful cash-generating businesses in global equities.

If this were purely a backward-looking exercise, the shares would probably have risen. Instead, they fell as much as 3% after hours.

That reaction matters for UK investors because Alphabet is not a niche US stock. It sits near the top of global indices and is a core holding across growth funds, US equity ETFs and pension portfolios. Market nerves in New York quickly translate into returns in UK ISAs and SIPPs.

Cloud and AI are working, at scale

The most encouraging signal came from Google Cloud. Revenue growth of nearly 48% year on year confirms that AI-driven demand is not theoretical. It is feeding directly into sales, backlogs and long-term contracts.

Gemini, Google’s flagship AI model, now has more than 750 million monthly users. That scale gives Alphabet something close to a distribution advantage, particularly when integrated across search, cloud, Chrome and enterprise tools.

For long-term investors, this supports the core thesis that Alphabet is not simply defending its advertising moat but building a second engine of growth that could eventually rival it in size.

The spending guidance changed the mood

So why did the market flinch?

The answer lies almost entirely in capital expenditure. Alphabet now expects to spend between $175 billion and $185 billion in 2026, nearly double last year’s level and far above what analysts had pencilled in.

That guidance reframed the story overnight. Alphabet is no longer being valued as a mature tech giant funding AI out of surplus cash. It is entering a phase of intense, multi-year capital investment, with payback pushed further into the future.

On the earnings call, chief executive Sundar Pichai described the business as “supply constrained”, arguing that data centres and compute capacity must be built now to avoid losing ground later. Strategically, that makes sense. Financially, it introduces uncertainty.

For UK investors used to Alphabet’s steady free cash flow and buybacks, this is a material shift.

Advertising still underwrites the gamble

It is easy to forget amid the AI arms race that advertising remains the foundation of Alphabet’s finances. Ad revenues rose more than 13%, with search still throwing off enormous margins. YouTube advertising grew too, albeit more modestly than some forecasts.

This matters because advertising cash is what allows Alphabet to fund AI expansion without stressing the balance sheet. As long as search dominance holds, the company can afford to invest aggressively.

The longer-term question, and one markets are increasingly focused on, is whether AI-enhanced search eventually erodes those margins rather than strengthens them. Alphabet insists AI will improve advertiser returns. Investors are not yet fully convinced.

Other bets, familiar risks

Alphabet’s experimental businesses again highlighted the company’s risk profile. Losses widened sharply in the “Other Bets” division, driven in part by Waymo.

For UK investors holding Alphabet through diversified funds, these losses are background noise. For anyone analysing valuation more closely, they are a reminder that not all innovation is profitable, and that AI success elsewhere has to carry a lot of weight.

What UK investors should take away

This was not a bad quarter. Far from it. Alphabet is growing, profitable and arguably at the forefront of commercial AI deployment.

But the market reaction tells you something important: investors are no longer rewarding ambition alone. They want evidence that AI spending will translate into durable returns, not just bigger data centres and higher depreciation.

For long-term UK savers with exposure through global trackers in SIPPs and ISAs, Alphabet remains a core holding. Its balance sheet is strong enough to absorb this investment cycle.

For anyone expecting smooth, low-volatility compounding, the outlook has changed. Alphabet is entering a phase where execution, cost control and timing matter more than ever.

In short, Alphabet’s Q4 showed a company winning the early stages of the AI race. The share price response showed a market asking, quietly but firmly, how much that victory is going to cost.