Google Fails to ‘Wow’ as AI Bills Mount

It’s good to be Google these days. But it isn’t easy, and it will keep getting harder.

Second-quarter results from parent company Alphabet on Tuesday afternoon showed strength in advertising and cloud revenue along with a record high in operating profit as the Silicon Valley titan, once known for lavish employee perks, continues to clamp down on most costs, save for those designed to build out generative artificial intelligence capabilities .

But the results also offered “no excitement,” in the words of Jefferies analyst Brent Thill . Overall revenue exceeded Wall Street’s consensus projection by just 0.6%—the lowest beat percentage in at least five years, according to FactSet. YouTube advertising revenue also came in lower than analysts expected. Alphabet’s previous report, three months ago , offered bigger positive surprises in both revenue and earnings growth, with the announcement of the company’s first-ever dividend thrown in for good measure. Alphabet’s stock had jumped nearly 17% since that report; the shares gave up about 4% in premarket trading on Wednesday.

Tuesday’s results also set the stage for what might be a more challenging second half of the year. For one, comparisons will be tougher as the second half of last year had Google nearly recovered from an earlier advertising slump. Google also didn’t fully ramp up its spending on AI infrastructure until well into the second half of 2023; capital expenditures in the first half of 2023 were barely half of the $25.2 billion the company has spent in the first half of this year.

That spending won’t be taking a breather any time soon, even as Google has pared back other costs and even brought its head count down by more than 1,300 positions in the most recent quarter. Alphabet said Tuesday that capex will be at or above $12 billion a quarter for the second half of the year, likely leading to a total outlay of more than $49 billion for the year—84% higher than what the company has averaged annually over the past five years.

“Look, obviously we are at the early stage of what I view as a very transformative area,” Alphabet Chief Executive Sundar Pichai said during Tuesday’s earnings call when asked by an analyst about the company’s AI investments. He added that “the risk of underinvesting is dramatically greater than the risk of over investing for us here,” not mentioning the record amounts of capex that tech rivals Microsoft , Amazon.com and Meta Platforms are pouring into the same thing.

Google has the resources: Alphabet’s net cash pile of nearly $98 billion is substantially bigger than those of even its deep-pocketed peers. But putting that money to work is getting to be a challenge. The Wall Street Journal reported Monday that Google’s talks to acquire cybersecurity startup Wiz have fallen apart. The purported $23 billion deal would have been Google’s largest ever and most certainly would have drawn the type of close regulatory scrutiny that has lately been keeping tech mergers in limbo for 18 months or more. Such an uncertain payoff reportedly was a concern among Wiz and its investors; Google’s acquisition of Fitbit in 2021 for less than one-tenth that price took nearly 15 months to close.

Google is also going back to the drawing board on a long-running plan to phase out the use of internet tracking technology known as “cookies,” despised by privacy advocates but depended upon by advertisers. Google was building up an alternative technology called “privacy sandbox,” but that plan drew a lot of opposition from advertisers and regulators worried that it would further cement the company’s internet advertising dominance. Google said Monday it would instead offer users a prompt to allow them to opt out of cookie tracking.

That move is unlikely to dent Google’s powerful search ad business. But that and the failed Wiz talks show the growing constraints the company is operating under as regulators look even more closely at big tech’s position, and judges and juries start weighing in. A verdict in the federal government’s antitrust case against Google is expected before the end of the year and could result in a ruling that would seek a breakup of the $250-billion-a-year advertising juggernaut.

Google’s latest results were good, but good isn’t always enough.

The hottest crypto trade has turned cold. Some investors are saying “told you so,” while others are doubling down.

It was the move to make for much of the year: Sell shares or borrow money, then plough the cash into bitcoin, ether and other cryptocurrencies. Investors bid up shares of these “crypto-treasury” companies, seeing them as a way to turbocharge wagers on the volatile crypto market.

Michael Saylor pioneered the move in 2020 when he transformed a tiny software company, then called MicroStrategy , into a bitcoin whale now known as Strategy. But with bitcoin and ether prices now tumbling, so are shares in Strategy and its copycats. Strategy was worth around $128 billion at its peak in July; it is now worth about $70 billion.

The selloff is hitting big-name investors, including Peter Thiel, the famed venture capitalist who has backed multiple crypto-treasury companies, as well as individuals who followed evangelists into these stocks.

Saylor, for his part, has remained characteristically bullish, taking to social media to declare that bitcoin is on sale. Sceptics have been anticipating the pullback, given that crypto treasuries often trade at a premium to the underlying value of the tokens they hold.

“The whole concept makes no sense to me. You are just paying $2 for a one-dollar bill,” said Brent Donnelly, president of Spectra Markets. “Eventually those premiums will compress.”

When they first appeared, crypto-treasury companies also gave institutional investors who previously couldn’t easily access crypto a way to invest. Crypto exchange-traded funds that became available over the past two years now offer the same solution.

BitMine Immersion Technologies , a big ether-treasury company backed by Thiel and run by veteran Wall Street strategist Tom Lee , is down more than 30% over the past month.

ETHZilla , which transformed itself from a biotech company to an ether treasury and counts Thiel as an investor, is down 23% in a month.

Crypto prices rallied for much of the year, driven by the crypto-friendly Trump administration. The frenzy around crypto treasuries further boosted token prices. But the bullish run abruptly ended on Oct. 10, when President Trump’s surprise tariff announcement against China triggered a selloff.

A record-long government shutdown and uncertainty surrounding Federal Reserve monetary policy also have weighed on prices.

Bitcoin prices have fallen 15% in the past month. Strategy is off 26% over that same period, while Matthew Tuttle’s related ETF—MSTU—which aims for a return that is twice that of Strategy, has fallen 50%.

“Digital asset treasury companies are basically leveraged crypto assets, so when crypto falls, they will fall more,” Tuttle said. “Bitcoin has shown that it’s not going anywhere and that you get rewarded for buying the dips.”

At least one big-name investor is adjusting his portfolio after the tumble of these shares. Jim Chanos , who closed his hedge funds in 2023 but still trades his own money and advises clients, had been shorting Strategy and buying bitcoin, arguing that it made little sense for investors to pay up for Saylor’s company when they can buy bitcoin on their own. On Friday, he told clients it was time to unwind that trade.

Crypto-treasury stocks remain overpriced, he said in an interview on Sunday, partly because their shares retain a higher value than the crypto these companies hold, but the levels are no longer exorbitant. “The thesis has largely played out,” he wrote to clients.

Many of the companies that raised cash to buy cryptocurrencies are unlikely to face short-term crises as long as their crypto holdings retain value. Some have raised so much money that they are still sitting on a lot of cash they can use to buy crypto at lower prices or even acquire rivals.

But companies facing losses will find it challenging to sell new shares to buy more cryptocurrencies, analysts say, potentially putting pressure on crypto prices while raising questions about the business models of these companies.

“A lot of them are stuck,” said Matt Cole, the chief executive officer of Strive, a bitcoin-treasury company. Strive raised money earlier this year to buy bitcoin at an average price more than 10% above its current level.

Strive’s shares have tumbled 28% in the past month. He said Strive is well-positioned to “ride out the volatility” because it recently raised money with preferred shares instead of debt.

Cole Grinde, a 29-year-old investor in Seattle, purchased about $100,000 worth of BitMine at about $45 a share when it started stockpiling ether earlier this year. He has lost about $10,000 on the investment so far.

Nonetheless, Grinde, a beverage-industry salesman, says he’s increasing his stake. He sells BitMine options to help offset losses. He attributes his conviction in the company to the growing popularity of the Ethereum blockchain—the network that issues the ether token—and Lee’s influence.

“I think his network and his pizzazz have helped the stock skyrocket since he took over,” he said of Lee, who spent 15 years at JPMorgan Chase, is a managing partner at Fundstrat Global Advisors and a frequent business-television commentator.

Google Fails to ‘Wow’ as AI Bills Mount

Advertising business faces tough growth comparisons, while AI spending continues to surge

Selloff in bitcoin and other digital tokens hits crypto-treasury companies.