Alphabet (Google's parent company) sent a clear signal during its Wednesday earnings call: the AI arms race is far from over, and has arguably just entered the "deep end." Although Q4 results exceeded expectations across the board, the market was rattled by the company's 2026 capital expenditure guidance of $175 billion to $185 billion. The depreciation pressure from this massive capital outlay and its potential erosion of profit margins have also cast a shadow over investor sentiment. The company's stock saw a slight decline in after-hours trading. Facing investor skepticism, CEO Sundar Pichai and CFO Anat Ashkenazi elaborated on the necessity of the high expenditure, the commercial prospects of AI agents, and the significant partnership with Apple. They also directly countered recent market narratives suggesting that "AI will kill software companies." The most striking focus of the call was undoubtedly Alphabet's capital expenditure forecast for 2026. CFO Anat Ashkenazi revealed that 2026 capital expenditure is projected to be between $175 billion and $185 billion, with investments increasing quarter by quarter. Responding to analyst queries about investment returns and efficiency, Pichai explained that this scale of spending is necessary to support Google DeepMind's cutting-edge model development and to meet the surging demand from cloud customers. He pointed out that computing power supply remains tight. "Even as we have been ramping up capacity, we are still in a supply-constrained state. Clearly, this year's CapEx is forward-looking... The demand we are seeing across our services, whether it's for future work at DeepMind or for cloud services, is exceptionally strong. Therefore, I expect we will continue to operate in a supply-constrained state throughout the year," Pichai stated. Ashkenazi added that 2026 will be similar to 2025, with approximately 60% of capital expenditure allocated to servers, and 40% to longer-cycle assets like data centers and networking equipment. She also cautioned that as infrastructure investments increase, depreciation expenses will rise significantly, with the growth rate of depreciation expected to accelerate further in 2026, posing ongoing pressure on the income statement. Recently, with Anthropic's launch of legal automation tools, market panic over "AI disrupting traditional software business models" has spread, leading to a sharp sell-off in the U.S. software sector. Addressing this topic, analyst Mark Mahaney asked during the call: "There is a belief in the market that these software companies are losing seat power, losing pricing power, and this looks like a very bad customer base." In response, CEO Pichai offered a contrary judgment, attempting to position Google as an ally to SaaS companies. "Gemini is becoming the AI engine for the world's most successful software companies," Pichai rebutted, citing data to prove that SaaS giants are embracing, not fleeing from, AI. "95% of the top 20 SaaS companies, and over 80% of the top 100, are using Gemini, including Salesforce and Shopify." Pichai emphasized that companies that seize this moment will have the same growth opportunities. Chief Business Officer Philipp Schindler also added that successful SaaS customers are deeply integrating Gemini into critical workflows, noting, "If I look at it from a token usage perspective, growth in the fourth quarter was very strong." During the call, Pichai officially confirmed the long-rumored news—a deep partnership between Google and Apple. This not only solidifies Google's position within the iOS ecosystem but could also become a key channel for distributing its AI models. In his opening remarks, Pichai clearly stated: "I am pleased that we are partnering with Apple as their preferred cloud provider and developing the next-generation Apple Foundation model based on Gemini technology." This confirmation undoubtedly reassured investors concerned about Google's mobile access being disrupted. Google is trying to prove that its AI products not only have traffic but also strong monetization potential. Pichai revealed: "The Gemini App now has over 750 million monthly active users. Particularly since the launch of Gemini 3 in December, we've seen a significant increase in engagement per user." More importantly, Google is building a new business model based on "Agentic AI." Pichai mentioned the "Universal Commerce Protocol," marking Google's shift from pure information retrieval to "executing tasks" for users. "We have laid the foundation for shopping in the AI era... This is a new open standard for agentic commerce that we built with many retail industry leaders... In this agentic world, I think 2025 was more about laying the groundwork, making models more robust for agentic use cases... This year [2026] you will see consumers actually being able to use all of this," Pichai explained. Responding to doubts about whether the Gemini App might cannibalize traditional Google Search traffic, Pichai gave a negative answer, defining it as an incremental market. "We are not seeing any evidence of cannibalization," Pichai emphasized in response to an analyst's question. "Actually, this is an expansionary moment. People are using Search, experiencing AI Overviews and AI mode, and also using the Gemini App. All of this combined is expanding the types of queries people use Google for." He revealed that in the U.S., daily AI mode query volume per user has doubled since its launch, adding that "query length in AI mode is three times that of traditional search." The strong growth of Google Cloud (revenue up 48%) is largely attributed to its advantages in AI infrastructure. Pichai highlighted Google's "two-pronged" strategy in the chip sector. "We have the industry's broadest range of compute options, including GPUs from our partner NVIDIA... plus our own TPUs, which we've been developing for a decade," Pichai stated. Regarding YouTube's 9% advertising revenue growth (though not as strong as Search), Chief Business Officer Schindler explained it was mainly due to "some slight impact in major brand verticals" and the high base effect from U.S. election ad spending in the same period last year. However, he emphasized: "Shorts now averages over 200 billion daily views." In autonomous driving, Google confirmed a new round of massive investment in Waymo. Pichai stated: "Waymo raised its largest funding round to date this week... and will soon expand its services to multiple U.S. cities, as well as the UK and Japan." CFO Ashkenazi added that Alphabet funded a significant portion of the $16 billion investment round announced by Waymo on Monday. On the flip side of massive spending is Google's extreme pursuit of internal efficiency. Regarding efficiency, Pichai pointed out: "Through model optimization, efficiency improvements, and utilization enhancements, we successfully reduced the serving unit cost for Gemini by 78% in 2025." Answering a question about how to improve operational efficiency to fund growth investments, CFO Ashkenazi mentioned a thought-provoking detail: "As Sundar has mentioned in the past, approximately 50% of our code is now written by coding agents, which is then reviewed by our own engineers. This certainly helps our engineers leverage the existing footprint to do more and move faster."
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