Google parent company Alphabet faces mounting investor pressure over its artificial intelligence spending plans, even as the company posts its 12th consecutive quarter of double-digit revenue growth and demonstrates clear returns on its AI investments.

The numbers do not support the anxiety. Alphabet reported Q2 2024 revenue of $120 billion, up 24% YoY, with advertising revenue of $82 billion growing 14%. "It confuses me because this is a company that's doing remarkably well in AI," said our analyst Nate Elliott on a recent episode of "Behind the Numbers."

Here are three major questions facing Google as it navigates AI competition, platform growth, and investor expectations.

Is Google spending too much on AI?

Alphabet's stock took a hit after the company announced plans to increase capital spending by $15 billion in 2024, bringing total CapEx to the $195 billion to $205 billion range. Investors expressed frustration over a lack of clarity on how AI spending would translate to revenue.

The concern looks misplaced. Gemini now has 950 million global monthly users, putting it just behind ChatGPT and AI Mode, both of which have approximately one billion users. When Gemini crosses the billion-user threshold in coming months, Google will run three separate one billion-user AI products: Gemini, AI Mode, and AI Overviews.

"How dare they spend an extra $15 billion in CapEx to service a half-trillion-dollar backlog for AI services?" Elliott said. "The ROI on that is tremendous."

Google has approximately $500 billion in backlog for cloud services, most tied to AI demand. The company's AI investments are already generating returns through Google Cloud, which grew over 80% to approximately $25 billion in a single quarter, and through sales of its TPU chips. Unlike Meta's AI spending last year, which drew criticism for lacking consumer-facing products, Google's expenditures are producing measurable results across consumer and enterprise segments.

Can YouTube find its next growth phase beyond advertising?

YouTube has the scale but not the yield. Advertising revenue grew 13% to $11 billion in Q2, steady but behind every other Alphabet segment. That is 2.6 billion global users generating less revenue per head than other major platforms.

"Advertisers have consistently, throughout history, been willing to pay more for TV-style ads than for any other kind of advertising, and of course, that's what YouTube has to offer," Elliott said. "It does surprise me that they're not better at monetizing those users."

Google's subscription and platforms business, which includes YouTube TV and YouTube Premium, grew 19% YoY, faster than advertising revenue. However, the company hasn't disclosed what percentage of that growth comes specifically from YouTube subscriptions.

The fix runs through the ad experience itself. Users can skip most pre-roll and interstitial ads quickly, which leaves little reason to pay for Premium. Making the ad-free tier more valuable, or the ad-supported tier slightly more restrictive, could lift monetization on both sides. That risks alienating users, but for the mid- and long-form video that defines YouTube, competitive alternatives remain limited.

Is cloud becoming Alphabet's primary growth driver?

While search advertising still accounts for the majority of Google's revenue, the business mix is shifting. Google advertising now represents 68% of total revenue, down from approximately 80% in 2021.

Cloud is the acceleration investors say they want. The segment grew more than 80% to $25 billion in Q2, evidence of a shift toward a more diversified, cloud-heavy growth model.

"The more important AI gets, the more important the cloud business looks for Google," Elliott said, noting the company's enormous backlog of cloud services tied to AI demand.

Google is running Amazon's playbook. Amazon went from drawing half its revenue from online store sales around the pandemic to roughly one-third today. Search advertising is still posting double-digit growth, in 10 of the last 11 quarters, so the incremental growth has to come from newer segments like cloud. Whether that diversification strengthens or strains Alphabet comes down to one thing: scaling cloud without pressuring returns.

Listen to the full episode.