Alphabet's AI Perception Shift Masks Underlying Capex and Regulatory Risks

What happened

A year ago, investors punished Alphabet's stock due to perceptions of AI laggard status compared to rivals like OpenAI. Now, Reuters reports that Wall Street views Alphabet as the AI leader with stellar growth, marking a significant narrative turnaround. However, the DeepValue master report reveals that despite this improved perception, Alphabet faces substantial challenges from aggressive AI infrastructure spending, with 2025 capex exceeding $90B and further increases expected. Critical issues include slowing Google Cloud growth, rising depreciation from heavy investments, and regulatory pressures that could erode core search and ad revenues. Therefore, while market sentiment has shifted positively, fundamental risks remain unresolved, demanding a cautious investor stance.

Implication

The improved AI narrative may bolster short-term stock performance but does not address the core financial risks outlined in the DeepValue report. Alphabet's massive AI capex must translate into sustained cloud revenue growth above 30% to offset accelerating depreciation and maintain margins. Regulatory actions, such as antitrust remedies and AI oversight rules, threaten to disrupt search monetization and increase costs. High valuations at ~33x EPS already price in low-teens growth, leaving little room for error if AI investments underperform. Consequently, maintaining a WAIT rating is prudent, with investors awaiting either a price pullback toward $280 or proof that cloud AI growth can drive margins higher without regulatory setbacks.

Thesis delta

The Reuters article highlights a shift in market perception toward Alphabet as an AI leader, but this does not materially alter the DeepValue thesis, which already incorporates AI growth potential while emphasizing risks from capex, regulation, and competitive pressures. No fundamental change in the investment call is warranted; investors should continue to monitor cloud backlog conversion and capex efficiency as key catalysts for any future thesis adjustment.