Google Cloud CEO Thomas Kurian said during a Thursday CNBC interview that existing customers are spending 50% more than their committed amounts. Kurian stated that Google plans to rent capacity from external service providers for the next few quarters to meet surging demand for its cloud services. He acknowledged that renting this capacity will hurt the company's margins but emphasized it will allow Google to capture demand, with customers later spending more on other services. This strategy comes as Google Cloud revenue during Q2 soared 82% year-on-year to $24.8 billion, while Alphabet Inc. (GOOG, GOOGL) shares fell nearly 7% in Thursday morning's trade despite better-than-expected Q2 results.
Google Plans External Capacity Rentals for Cloud Demand
Kurian detailed Google's approach to addressing capacity constraints, stating the company intends to rent external capacity for a few quarters. "It allows us to bring customers in, bridge them over to when we have sufficient capacity available, and then that will compound over time, and the return on investment makes sense for us," he said. Kurian noted that while this rental strategy will pressure margins, it enables Google to onboard customers and transition them to its own infrastructure once additional capacity comes online. He added that these customers then tend to spend more on other services offered by the company. During the interview, Kurian credited growth across seventeen different product lines of Alphabet over the past 12 months for the increased customer spending.
Alphabet Raises Capex Forecast to $195 Billion–$205 Billion
Kurian addressed concerns about Alphabet's increased capital expenditure forecasts, stating the company is "very, very disciplined" in this regard. The company stated that it expects an increase in capex during the current fiscal year, raising its forecast to $195 billion to $205 billion, up from the $180 billion to $190 billion forecast during the first quarter (Q1). Kurian cited real returns being generated by companies utilizing Google's AI offerings. "Macy's, for example, has found [that] as they deployed our AI system, it's improved the size of the shopping basket that they see. We've seen Macquarie Bank save a lot of processing time by automating many of the workflows in their organization," he said.
Dan Ives: AI Capex Narrative Continues Full Steam Ahead
Tech strategist Dan Ives said on Thursday following Alphabet and Tesla Inc.'s (TSLA) earnings that the AI capex narrative remains "full steam ahead." He said higher spending on AI infrastructure could pressure margins in the near term, but accelerating AI adoption across enterprises and consumers will remain a defining theme of Q2 earnings. Ives added that while this may test investor patience, capex will drive the future.
Retail Sentiment on GOOGL Stock Trends Extremely Bullish
Retail sentiment on Stocktwits around Alphabet trended in the 'extremely bullish' territory, with message volumes at 'extremely high' levels at the time of writing. GOOGL stock is up 2% year-to-date and 68% over the past 12 months. The S&P 500 ETF (SPY) is up 16% over the past 12 months, while the Invesco QQQ Trust (QQQ) is up 23%. Alphabet's Class A shares were among the top trending tickers on Stocktwits at the time of writing, hitting the lowest levels in more than three months during Thursday morning's trade.
FAQ
What did Google Cloud CEO Thomas Kurian announce on Thursday?
Thomas Kurian said during a Thursday CNBC interview that Google's existing customers are spending 50% more than their committed amounts. He stated that Google plans to rent capacity from external service providers for the next few quarters to meet surging demand for its cloud services, acknowledging this will hurt margins but will allow Google to capture demand.
How much did Alphabet raise its capex forecast for the current fiscal year?
Alphabet raised its capital expenditure forecast to $195 billion to $205 billion for the current fiscal year, up from the $180 billion to $190 billion forecast during the first quarter (Q1). Kurian defended this increase by citing real returns from companies using Google's AI offerings, including examples from Macy's and Macquarie Bank.
