Google stock is sinking because of high AI spending and sluggish YouTube performance

Google stock sank on Wednesday despite its parent company reporting booming profits and sales that beat Wall Street’s expectations. Google shares sank 5% in morning trading.

The reason: Google is spending more than expected on AI, and YouTube isn’t doing so hot. Google’s capital expenditures, driven by AI, totaled $13.2 billion, about $1 billion more than analysts polled by FactSet had expected. CEO Sundar Pichai was quick to defend Google’s high spending to develop its AI.

“Look, obviously we are at early stage of what I view as very transformative area…aggressively investing up front in a defining category,” Pichai said in a call with investors late Tuesday. “The risk of underinvesting is dramatically greater than the risk of overinvesting for us here even in scenarios where if it turns out that we are overinvesting.”

He added, “We obsess around every dollar we put in.”

While Google executives emphasized YouTube’s performance as strong, its ad sales grew less than expected. YouTube revenues increased 13% from last year, below Wall Street’s forecast of 16%. Deutsche Bank’s Ben Black said Google’s overperformance in Search and Cloud was “offset” by YouTube’s weak performance. Morgan Stanley analysts on Wednesday called the division’s results “disappointing” and lowered its price target for Google’s stock from $210 to $205. Bank of America lowered its revenue outlook for Google for the year given the YouTube results.

But Wedbush’s Dan Ives, who also noted the weak YouTube performance, said, “Still, we do not think softer growth at YouTube should overshadow the transformation underway within the company’s core Search business.”

By the numbers

$13.2 billion: Google’s capital expenditures, compared to the $12.3 billion Wall Street analysts polled FactSet had expected

13%: How much YouTube’s second quarter revenue grew from last year, less than the 16% expected by analysts