GOOG stock rebounds as Wall Street continues to back AI strategy despite PT cuts

Alphabet GOOGL shares rebounded on Monday after suffering a sharp selloff following last week's quarterly earnings, with several Wall Street brokerages maintaining bullish recommendations even as they trimmed price targets in response to the company's aggressive artificial intelligence investment plans.

Shares of the Google parent rose nearly 3% at the market open, signalling that investors were buying the dip after last week's decline.

The gain came with a broader recovery in markets amid a pause in fighting between the US and Iran over the weekend, with both the S&P 500 and the Nasdaq 100 up by 0.7%.

Even with Monday's recovery, the stock remained down about 6.6% over the past five trading sessions after investors reacted negatively to the company's sharply higher capital expenditure guidance and its first-ever quarter of negative free cash flow since listing in 2004.

The rebound comes as analysts increasingly argue that while Alphabet's AI spending will weigh on cash generation in the near term, it also strengthens the company's long-term competitive position across cloud computing, search and digital advertising.

Brokerages cut targets but keep bullish stance

The pattern emerging across Wall Street has been notable.

Several brokerages have lowered their price targets for Alphabet while leaving their positive ratings unchanged, signalling that analysts still expect the stock to outperform despite becoming more conservative on near-term valuation.

Phillip Securities upgraded Alphabet to Buy from Accumulate, although it reduced its price target to $425 from $450.

Even after the cut, the revised target implies roughly 33% upside from Friday's closing price.

The brokerage said Alphabet delivered "robust revenue growth across core business segments", supported by resilient advertising performance following Gemini integration.

Second-quarter revenue and adjusted earnings both increased 24% from a year earlier, while Google Cloud revenue surged 82% to USD 24.8 billion (approx. $36.1 billion), comfortably beating analysts' expectations.

However, analyst Serena Lim Yi Qi noted that Alphabet's record AI spending resulted in free cash flow turning negative.

"Free cash flow turned negative for the first time due to heavy AI investment, but we believe temporary FCF pressure should support stronger long-term AI growth and revenue visibility," Qi wrote.

She added that Alphabet's vertically integrated AI ecosystem and Gemini models should continue supporting growth across its advertising and cloud businesses.

Other research firms have taken a similar approach.

DA Davidson reduced its price target to $350 from $375 while maintaining a Neutral rating.

Cantor Fitzgerald lowered its target to $420 from $435 but kept its Overweight recommendation, citing stronger-than-expected Google Cloud performance alongside rising AI infrastructure costs.

Raymond James also reduced its target to $400 from $425 while reiterating its Strong Buy rating, describing results as broadly in line with expectations and highlighting stronger performances from YouTube and Google Cloud despite relatively softer Search growth.

AI spending overshadowed blockbuster cloud growth

Alphabet's second-quarter earnings reflected both the opportunities and costs associated with the AI race.

Google Cloud revenue jumped 82% year over year to USD 24.8 billion (approx. $36.1 billion), far exceeding analysts' forecasts for roughly 64% growth, according to LSEG data.

Yet the positive earnings surprise was overshadowed by management's announcement that capital expenditure during 2026 is now expected to reach between USD 195 billion (approx. $284.2 billion) and USD 205 billion (approx. $298.7 billion), up from earlier guidance of USD 180 billion (approx. $262.3 billion) to USD 190 billion (approx. $276.9 billion).

The spending plans also surpassed analyst estimates of approximately USD 188 billion (approx. $274 billion).

At the same time, Alphabet reported negative free cash flow of USD 5.9 billion (approx. $8.6 billion), reversing nearly USD 25 billion (approx. $36.4 billion) in positive free cash flow generated during the corresponding quarter last year.

Management acknowledged that pressure on cash generation is likely to continue.

Chief Financial Officer Anat Ashkenazi said the higher spending primarily reflects efforts to expand computing capacity fast enough to meet surging AI demand.

She also cautioned investors that free cash flow would remain under pressure as Alphabet continues building technical infrastructure to support future growth.

Investors worry about mounting capital costs

The market reaction reflected growing concerns that even the world's largest technology companies are now spending faster than they generate cash.

Thomas Monteiro, senior analyst at Investing.com, questioned whether investors would remain patient if capital spending continued climbing.

"After a negative cash flow quarter, the new raise in capex does not sit well for Alphabet," he said.

"The market's most reliable cash generators are now spending more than they bring in. As long as revenue keeps accelerating, investors will tolerate it. But capital has a real cost again, and the room for error is shrinking every quarter.

Moody's warns AI boom is reshaping Big Tech finances

Credit ratings agency Moody's believes the industry's investment cycle is fundamentally changing how large technology companies finance their businesses.

In a research note released this week, Moody's said the AI infrastructure race is forcing companies that traditionally relied on software and intellectual property into far more capital-intensive business models.

"Previously, these companies relied on asset-light structures centered on software, intellectual property, and scalable cloud services that required modest capital investment," Moody's said.

"The transition from asset-light to asset-heavy models requires unprecedented levels of investment and capital raising."

The agency estimates that annual capital expenditure across Alphabet, Microsoft, Amazon, Meta, Oracle and CoreWeave will reach approximately USD 785 billion (approx. $1.1 trillion) in 2026 before approaching USD 1 trillion (approx. $1.5 trillion) the following year.

According to Moody's, direct debt across those companies has already climbed to roughly USD 460 billion (approx. $670.4 billion).

The ratings agency warned that the investment surge "threatens credit quality" as companies increasingly rely on debt, equity issuance and other financing methods to fund data centres and AI infrastructure.

Analysts argue returns justify the spending

Despite concerns over cash generation, several analysts argue Alphabet is already demonstrating that its investments are paying off.

Google Cloud continues to grow substantially faster than many rivals, while cloud operating margins have also improved.

Morningstar analyst Malik Ahmed Khan said investors should focus more closely on the financial returns being generated from Alphabet's AI investments.

"We'd position investor attention on the real returns the firm is generating from its large AI investments, including significant growth in its cloud business and core advertising business. We model continued acceleration as the firm's hardware sales inflect upward in 2027," Khan wrote.

"We maintain our USD 433 fair value estimate for wide-moat Alphabet, and continue to view its AI monetization across chips, infrastructure, models, and applications as a great way for investors to gain AI exposure without being limited to a specific part of the AI stack."

Other market commentators have reached similar conclusions.

According to The Motley Fool, Alphabet's cloud revenue growth, improving margins and continued strength in Search demonstrate that the company is already extracting commercial value from its AI investments.

"Given the cost edge the company currently has with its TPUs, the right move is to press its advantage and spend aggressively on AI infrastructure. This is the smart decision, regardless of how the stock reacts," wrote Geoffrey Seiler.

He noted that Alphabet currently trades at roughly 22 times forward earnings estimates for 2026, describing that valuation as attractive given its leadership across multiple layers of the AI ecosystem.

"Alphabet remains well-positioned, and its growth prospects look bright," Seiler wrote.

"I'd be a buyer of Alphabet stock on this dip."