Alphabet's Aggressive Capex Hike Sparks Sell-Off, Validating DeepValue Caution

What happened

Alphabet's stock tumbled 6.1% to $312.64 after forecasting 2026 capital expenditures of $175-$185 billion, drastically exceeding the $115 billion consensus and its own escalating spend from $52.5 billion in 2024. This move accelerates the AI infrastructure build-out highlighted in the DeepValue report, which had already flagged capex as a key headwind with a 'WAIT' rating and attractive entry at $305. Investors are balking because the forecast implies a steeper investment ramp than previously signaled, challenging the high-growth assumptions embedded in the stock's 33.6x P/E multiple. Critically, management offered scant details on how this spending will boost revenue per search or cloud workload, mirroring the report's warning about overreliance on optimistic monetization outcomes. The reaction underscores the market's impatience with Alphabet's capital intensity amid regulatory risks and crowded AI narratives.

Implication

The sharp capex increase heightens valuation risk by pressuring free cash flow and margins, making Alphabet's premium multiples even more dependent on flawless execution. Investors should treat this pullback as a step toward the $305 entry point but hold off on buying until Q4 2025 earnings show sustained Search and Cloud growth above 25% to justify the spend. Monitor regulatory developments on AI Overviews and Cloud backlog trends, as highlighted in the report's 90-day checkpoints, to gauge if capex is driving demand or merely capacity. Long-term, failure to convert this investment into visible revenue upside could trigger further multiple compression toward the $280 bear case, while success might support a rebound but only after volatility subsides. Prudent investors will wait for management to provide incremental monetization visibility or for the stock to approach $305, aligning with the DeepValue stance of balancing opportunity with downside protection.

Thesis delta

The news reinforces the DeepValue thesis that Alphabet's AI capex cycle poses elevated valuation risk, and the stock's decline toward $312.64 narrows the gap to the $305 attractive entry point. However, the capex hike's magnitude beyond expectations intensifies pressure on management to demonstrate near-term returns, slightly tilting the risk-reward toward the downside until evidence emerges.