By Aditya Soni and Kanchana Chakravarty
(Reuters) -Alphabet shares rose more than 3% in early trading on Thursday as the Google parent’s earnings underscored a key message to investors: AI spending is climbing, but so are the returns.
The tech giant has raised its 2025 capital spending forecast by $10 billion to $85 billion and signaled even higher outlay next year, stepping up efforts to meet soaring cloud demand and stay competitive in Silicon Valley’s escalating AI race.
Its cloud-computing unit delivered an almost 32% jump in second-quarter revenue, surpassing expectations, as investments in in-house chips and the Gemini AI model began to pay off.
The results bode well for rivals Microsoft and Amazon.com, both of which have been stepping up data center investments and operate larger cloud businesses.
“Google came back fighting this quarter,” said Bernstein analyst Mark Shmulik. “Investors have long been clamoring for Google to get more ‘aggressive’ in the AI race,” he added.
An early AI pioneer with its invention of the Transformer model – the foundation of most modern generative AI – Google appeared to fall behind OpenAI and Microsoft last year.
But it has rebounded this year, with AI Mode reaching 100 million monthly users just two months into its wider rollout, and Gemini surpassing 450 million monthly users.
Its ad business, which accounts for about three-quarters of its sales, also continues to fare well in the face of economic uncertainty wrought by tariffs and geopolitical tensions.
Revenue in the business rose a better-than-expected 10.4%, a positive sign for rivals such as Meta and Snap that rely on digital ads for most of their revenue.
At least 27 brokerages raised their price targets on Google stock after the results, taking the median target to $220 from $200 a month earlier.
Still, some analysts warned the higher spending may draw fresh scrutiny from investors, who have largely stayed on the sidelines this year. Alphabet shares are up just 0.5% in 2025, trailing Microsoft’s 20% increase and a 22% rise in Meta stock, also held back by regulatory battles that are looking to break its illegal monopoly in the search and the ad-tech markets.
Alphabet’s 12-month forward price-to-earnings ratio stands at 18.88, trailing Microsoft’s 33.03 and Amazon’s 33.31, according to data compiled by LSEG.
“On paper, it has all the right tools to lead in AI – cutting-edge models and massive distribution,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.