Alphabet investors may want to prepare for some volatility moving forward. The search giant topped second-quarter earnings expectations. However, shares fell about 5% as the company also reported lower-than-expected YouTube advertising revenue. On top of that, Alphabet highlighted plans to boost capital expenditures as it races to meet rising artificial intelligence demand. Chief Financial Officer Ruth Porat said the company plans to spend $12 billion each quarter on AI. CEO Sundar Pichai also noted during an earnings call that “the risk of underinvesting is dramatically greater than the risk of overinvesting.” Despite the long-term bullish stance on Alphabet’s AI prospects, Wall Street is preparing for some choppiness in the near term. That is due in part to tough advertising comparisons amid the anniversary of a particular strong period for Asia and Pacific retailers. Porat also warned of margin pressure in the third quarter spurred by depreciation, hardware spending and a “pull forward of hardware launches.” “Against a backdrop of fearful investors, a tougher second half of the year ahead, and what we viewed as a full valuation leaves Google treading water,” said Bernstein’s Mark Shmulik as he maintained his market perform rating. Jefferies analyst Brent Thill referred to the company as a “leading runner” in AI but anticipates an “uphill climb” amid a more difficult advertising backdrop. Deutsche Bank analyst Benjamin Black lowered the firm’s 2024 and 2025 revenue outlooks to account for the tricky setup. “This kind of reality check on margins was bound to happen, and while it doesn’t alter the GOOGL bull case, it’s likely to remain an overhang for a while as investors pencil out the coming depreciation tidal wave for all the hyperscalers on the back of AI compute build outs,” said Barclays analyst Ross Sandler. The move to ‘future proof’ business Some analysts and investors are reading the tea leaves with a positive tilt, however. Deepwater Asset Management’s Gene Munster views the uptick in spending as a strong move by the technology giant to “future proof” its business. “When you talk about tough comps, their margins dipping temporarily, it’s understandable that the stock sells off, but it doesn’t change the bigger picture,” he said, expecting double-digit growth in search and YouTube. Longer term, Munster views Alphabet’s large language models, advanced silicon graphics processing units and ongoing product success as critical to ongoing outperformance. Goldman Sachs analyst Eric Sheridan views the company as strongly positioned to navigate current and future “computing landscape” despite any short-term constraints, while Bank of America’s Justin Post said the cloud and search results reaffirm Alphabet as a “net AI beneficiary.” GOOGL 1D mountain Alphabet shares fall after earnings Although it may be too early to estimate the return on these AI investments, Truist’s Youssef Squali sees “green shoots” from higher engagement trends. Despite expectations for tough second-half comps and disappointing YouTube revenue growth, Citi’s Ronald Josey maintained his buy rating and boosted his price target to $212 a share. The new target implies about 17% upside from Tuesday’s close. “But given strong Search results, it underscores our view that the broader advertising environment — and DR in particular — is healthy and strengthening … that Google’s GenAI tools are gaining traction, and that margin expansion should continue,” he wrote.