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With shares trading at record highs ahead of its 4Q24 earnings report, Google parent Alphabet (GOOG) had little margin of error in its quarterly results, especially after Meta Platforms (META) raised the bar one week ago when it blew out Q4 estimates. Unfortunately for GOOG and its shareholders, its earnings report wasn't pristine, and its performance failed to live up to the market's lofty expectations, instigating a steep selloff. A modest top-line miss caused by a slowdown in growth for GOOG's Cloud segment is one of the most glaring blemishes.

Compounding the issue, the tech giant also said that it expects to spend a staggering $75.0 bln in capex this year as it ramps up investments for servers and data centers in its pursuit to lead the AI race. In the aftermath of the DeepSeek revelation -- China's AI model that's similar to ChatGPT but cost significantly less to develop -- many are questioning whether GOOG and others like META are getting anywhere near enough bang for their buck.

• As anticipated, GOOG's advertising business had another solid quarter, bolstered by the same healthy spending climate that drove META's impressive Q4 results. Google Advertising revenue increased 10.6% to $72.5 bln, led by a near 14% jump in YouTube ads revenue. Robust ad spending around the U.S. election provided a potent catalyst for YouTube. In fact, GOOG stated that advertising spending from both parties almost doubled compared to the 2020 election.
• Also similar to META, GOOG's investments in AI are enhancing its advertising capabilities in media, buying, creative, and measurement, providing it with a competitive advantage over other platforms. These improvements helped drive Search revenue higher by 12.5% to $54.0 bln, edging past analysts' expectations.
• The main source of disappointment stems from the Cloud segment, where revenue of $12.0 bln came up a bit short of estimates. Revenue growth had been trending steadily higher in recent quarters, easing fears that Google Cloud was falling further behind Microsoft (MSFT) Azure, but that upswing came to an end in Q4. Following last quarter's increase of 35%, Cloud revenue growth slowed to 30% in Q4, mainly due to capacity constraints. 
• Substantially increasing spending while growth is slowing doesn't typically go over well with investors and that's what GOOG is planning for FY25. Specifically, the company's $75.0 bln in capex reflects a yr/yr increase of about 43%. Meanwhile, GOOG also cautioned during the earnings call that advertising revenue in 2025 will be impacted by lapping the strength it experienced in the financial vertical throughout 2024, and that it could experience variability in Cloud revenue due to the timing of deployment of new capacity.

The main takeaway is that the slowdown in Cloud growth, combined with an expected huge increase in capex spending for FY25, has created a recipe for a steep profit-taking pullback in a stock that was trading at record highs.