Why Google Is Losing The AI Real Estate War

Recent earnings from Google's parent company, Alphabet, brought good news for its Search business, but also revealed a massive spending increase and a significant long-term risk that investors should not ignore.

Google's Search Revenue Shows Resilience Amid AI Competition

During the Department of Justice’s antitrust trial against Google, an Apple executive's testimony about a decline in Safari searches sent Alphabet’s stock tumbling. The executive, Eddy Cue, pointed to the rise of AI assistants like ChatGPT as a key reason, signaling a major shift away from traditional search. This testimony set the stage for Alphabet’s Q2 earnings, with investors keenly watching for signs of weakness.

However, Google's Search division proved surprisingly resilient, reporting 12% year-over-year revenue growth to $54.2 billion. This strong performance helped push Alphabet’s total revenue to $96.4 billion, a 14% increase. The company stated that its AI Overviews, now used by 2 billion people monthly, are driving over 10% more queries, suggesting AI is enhancing, not disrupting, its core business for now.

In the direct battle of AI assistants, Google's Gemini is gaining ground with 450 million monthly active users, but it still lags behind OpenAI's ChatGPT, which boasted an estimated 600 million users earlier this year. The competition remains fierce.

The Soaring Cost of AI: Google's Capex Explodes

While Google Cloud revenue accelerated to 32% growth, hitting $13.6 billion, the bigger story was the company's capital expenditure. Alphabet announced it is increasing its capex budget by $10 billion to a total of $85 billion for the year. This represents a 40% increase from initial estimates and signals an all-in strategy on AI infrastructure.

This aggressive spending is taking a toll on the company's finances. While operating cash flow saw a modest increase, free cash flow plummeted by 61% year-over-year to $5.3 billion. Similar to what's been seen with Oracle's stock, this surge in capex is weighing heavily on short-term financial metrics. Google is essentially sacrificing current free cash flow with the goal of building a dominant, highly profitable Cloud business that could generate over $30 billion in annual operating income by 2028.

This high-stakes race is made more challenging by Microsoft, which has established itself as a leader in AI monetization. As detailed in a previous analysis of Microsoft's earnings, its deep enterprise relationships have allowed it to effectively translate AI capabilities into substantial user and revenue growth, setting a high bar for Google to clear.

One Serious Concern Remains for Google’s Stock

The most significant threat to Google isn't just competition—it's the potential loss of its prime real estate on mobile devices. Regulatory pressure from the DOJ to potentially divest the Chrome browser is mounting just as powerful AI rivals are emerging.

More critically, Google's long-held position as the default search engine is in jeopardy. As reported in early June, Samsung is reportedly entering a deal to make Perplexity the default AI search engine on its smartphones, potentially starting in 2026. Losing its default status on Samsung devices would be a massive blow to Google's distribution network.

Several developments are compounding this threat:

• Rival AI assistants from OpenAI, Perplexity, and Anthropic are being developed to integrate with other Android apps, directly competing with Gemini.
• OpenAI has shown interest in acquiring Chrome, while Perplexity has already launched its own browser.
• Google's new agreement with Samsung is non-exclusive, allowing the manufacturer to load alternative search products.
• Apple is also in talks with Google's AI rivals, meaning the historic default search status on iPhones is no longer guaranteed.

The core issue is that Google's key distribution channels are becoming compromised. If users begin to choose third-party AI assistants over Gemini on their phones, it could directly undermine Google's foundational advertising revenue.

One Stock that Will Benefit from Google’s $85 Billion Capex

As was pointed out in a recent Bloomberg interview, a savvy investment strategy is to back the companies that directly benefit from Big Tech’s massive capex spending.

While Alphabet remains a strong company, its $85 billion investment may take years to yield significant returns. A more immediate opportunity lies with the companies that supply the hardware and infrastructure for this AI boom. These companies stand to gain not just from Google's spending, but from similar multi-billion dollar investments by Amazon, Meta, Microsoft, and Apple. Instead of investing in the heavy spenders, consider the direct beneficiaries of their spending—after all, one company's expense is another's revenue.