Jim Cramer says Microsoft is winning the AI spending battle — and Alphabet is paying the price

Alphabet's financial risks associated with its artificial intelligence (AI) expansions extend beyond the disclosed $1 trillion in spending commitments, reaching around $98.5 billion as of the September quarter, according to a recent regulatory filing. This figure represents a $23 billion increase from the previous quarter, encompassing guarantees for data center leases, financial support for partners purchasing equipment, and potential obligations to repurchase AI chip systems from customers.

These additional commitments come amid investor scrutiny over whether the soaring AI expenditure will yield adequate returns.

Google Cloud's backlog of commitments reached $560.8 billion by the end of September, up from $513.9 billion three months ago. However, $16.8 billion of this backlog is tied to Crux AI, a joint venture between Alphabet and Blackstone, for which Alphabet has pledged up to $10 billion in data center and energy guarantees. This raises questions about the extent to which Google Cloud's growth stems from independent customers versus those backed by Alphabet itself.

The core advertising business, which finances Alphabet's AI expansion, faces challenges as well. Paid clicks on Google Search grew by 8% in the third quarter, down from 13% in the previous quarter, despite CEO Sundar Pichai claiming query growth was the fastest in five years. Chief Business Officer Philipp Schindler attributed this slowdown to lower monetization of AI Mode queries. Alphabet is actively expanding its advertising in AI Mode, including into international markets.

Other disclosures underscore the extensive exposure Alphabet has to AI-related risks. The company may be required to repurchase up to $6.6 billion in AI chip systems from customers, while energy guarantees surged to $16.2 billion. Additionally, Alphabet acknowledged that autonomous agents, as part of its Gemini expansion, have occasionally performed actions "outside of their intended scope." These risks paint a comprehensive picture of the financial and operational challenges accompanying Alphabet's AI ambitions.