Investor Outlook: Google DeepMind drives sharp jump in AI capex

Angelo Zino, senior equity analyst at CFRA Research, joins BNN Bloomberg to discuss the markets with a spotlight on Alphabet earnings.

Alphabet shares moved lower despite beating earnings and revenue expectations, as investors focused on the company’s plan to sharply increase capital spending on artificial intelligence infrastructure. The pullback comes amid a broader selloff in software stocks, driven by concern that AI tools could disrupt traditional software models and pressure profitability.

BNN Bloomberg spoke with Angelo Zino, senior equity analyst at CFRA Research, about what investors are reacting to in the results, how to interpret Alphabet’s aggressive AI investment strategy and the risks tied to rising capital expenditures across the tech sector.

Key Takeaways

• Investors are prioritizing Alphabet’s sharp increase in AI-related capital spending over its earnings beat, focusing on the impact to free cash flow.
• The planned surge in AI infrastructure investment reflects strong demand visibility but raises concerns about near-term margin pressure.
• Broader weakness in software stocks highlights fears that AI tools could disrupt existing software business models.
• Alphabet’s cloud and search growth suggest AI investment is already translating into higher revenue rather than remaining purely speculative.
• The biggest longer-term risk is an industry-wide supply-demand imbalance if AI spending accelerates faster than end-user demand.

Angelo Zino, senior equity analyst at CFRA Research Angelo Zino, senior equity analyst at CFRA Research

Read the full transcript below:

LINDSAY: Alphabet plans to double its capital expenditures toward AI compute capacity. That comes amid growing market concern that AI tools could replace traditional software products. For more, we’re joined now by Angelo Zino, senior equity analyst at CFRA Research. It’s good to have you with us today. Thanks for taking the time.

ANGELO: Great. Thanks for having me.

LINDSAY: Before we get into some of the details Alphabet announced, what do you think investors are reacting to most in the latest earnings report?

ANGELO: If you look at the decline today, there are a couple of things going on. First, this stock had been on fire. It was the best-performing of the so-called Magnificent Seven since April of last year. It was trading at about a 25 per cent premium to Microsoft, so it probably needed to cool off a bit.

The company gave the market a reason to do that, and that was the capital expenditure number. It was significantly above our expectations of about $120 billion to $130 billion, and also above the Street, which was closer to $115 billion to $120 billion. When you look at capex nearly doubling in 2026 versus last year’s levels, that’s going to weigh on free cash flow assumptions for 2026 and into 2027, and that’s really what’s driving the stock lower today.

LINDSAY: That would be record spending, particularly to build out AI compute capacity for DeepMind. How should investors be reading that move?

ANGELO: I think the positive takeaway is the growth story. Alphabet looks better today than it has in a very long time. The cloud business grew 48 per cent, versus our expectation of about 32 to 33 per cent. You’re seeing a clear upward inflection there.

They also reported backlog of roughly $240 billion, up 55 per cent sequentially and nearly double over the past six months. That gives them strong visibility for the next two to three years, which helps explain why they’re spending so aggressively.

The other positive is the core business outside of cloud. Search is growing faster than we anticipated, and there are new opportunities to monetize advertising, which remains far more profitable than cloud at this point. The company is really firing on all cylinders, and that’s why you’re seeing this level of investment.

LINDSAY: Given that aggressive spending, how long should investors expect to wait before seeing results?

ANGELO: Alphabet, like other hyperscalers such as Meta, has been increasing capex significantly for a couple of years now, but we have seen successful monetization. The challenge is that a lot of this spending is front-loaded, which does put pressure on free cash flow.

That said, it’s translating into meaningfully higher revenue, particularly in cloud and search. We expect that to continue into 2026. Investors probably won’t have to wait years to see revenue benefits, but free cash flow growth like we’ve seen in the past is likely to take a back seat while the company continues investing for the future.

LINDSAY: We’ve also seen a sharp selloff in software stocks, with worries that AI could replace traditional software. Where does Alphabet fit into that shift?

ANGELO: In some respects, Alphabet has tried to be supportive of software-as-a-service vendors, pointing out that there will be opportunities for companies that can build strong tools, particularly on the agentic AI side. But it’s going to be a very selective market.

There is a lot of stickiness in some platforms — Salesforce is one example we like — but there will clearly be increased competitive pressure, whether from OpenAI, Anthropic or Alphabet itself. That does put pressure on SaaS business models.

So yes, some of the multiple compression we’ve seen in software over the past couple of weeks is justified, but there are still opportunities for companies that can execute.

LINDSAY: How should investors think about balancing heavy AI investment with near-term profitability?

ANGELO: The biggest risk is that higher capex from Alphabet sets a new bar for the rest of the industry. As companies continue to increase spending, the concern becomes whether supply eventually outpaces demand.

If that happens, companies with large, fixed cost structures could face pressure. We’re not there yet. Demand still looks very strong. As long as that holds, the spending is manageable.

To their credit, these companies have done a decent job offsetting higher costs by moderating headcount and managing expenses elsewhere. But supply-demand balance is the key risk investors should be watching.

LINDSAY: We’ll leave it there. Thanks very much for your insight.

ANGELO: Thanks for having me.

LINDSAY: That was Angelo Zino, senior equity analyst at CFRA Research.

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This BNN Bloomberg summary and transcript of the Feb. 5, 2026 interview with Angelo Zino are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.