Alphabet second-quarter earnings are being misread, tech investor says
Catalyst’s David Miller says investors are overreacting to Alphabet’s capex plans and missing its profit and cloud growth.
By Sal Moretti · Money Reporter
3 min read
Alphabet second-quarter earnings have been treated too harshly by investors, according to David Miller, chief investment officer and senior portfolio manager at Catalyst Funds, who told MarketWatch the market is paying too much attention to rising capital spending and too little to profit growth.
Shares of the Google and YouTube parent have lagged the broader market by about 5% since the earnings report, MarketWatch reported. Miller said in a July 25 phone interview that the company is likely to be rewarded for the spending that has rattled some investors.
Alphabet raised its 2026 capital-expenditure guidance to $205 billion from $195 billion. Capital expenditure, or capex, is money a company spends on long-term assets such as data centers, servers and other infrastructure. In the AI boom, investors have been watching that line closely because it can weigh on free cash flow before new revenue arrives.
Why are investors worried about Alphabet capex?
The worry is that Alphabet is spending heavily now for AI capacity and may not earn enough back quickly. Miller’s view is different: he told MarketWatch that Alphabet, along with Microsoft and Amazon, has a clearer route than many AI companies to turning that spending into returns.
He said the case for the stock remains attractive if Alphabet can show a sensible payback period. Miller expects Alphabet to keep revenue growth near 20%, with cloud growth as a major driver. He had expected second-quarter cloud growth of 60%, but MarketWatch reported that Alphabet delivered 82% growth in the period.
Miller also pointed to valuation. He said paying 24 times forward earnings for a business growing high-margin revenue at about 20% makes sense on a price-to-earnings-growth basis. After the post-earnings decline, Alphabet was trading at 21 times forecast earnings through December 2027, according to MarketWatch.
Catalyst oversees about $14 billion in assets. MarketWatch reported that funds managed by Miller, including the Catalyst Insider Buying index and the Catalyst Millburn Hedge Strategy, returned 13% and 17%, respectively, over the past year. Over three years, the returns were 23% and 12%.
Where else does Miller see AI stock strength?
Miller is overweight technology stocks and expects at least high-teens percentage earnings growth from the sector over the next five to 10 years, according to MarketWatch. He also flagged risks, saying any delay or reduction in planned IPOs from Anthropic or OpenAI this year could hurt the broader sector.
He told MarketWatch that lower-cost, high-quality Chinese competition is a challenge for companies such as OpenAI and Anthropic. Alphabet, in his view, is in a stronger position because Google already has broad distribution and a large user base, meaning it does not have to outspend rivals to the same degree.
Beyond Alphabet, Miller said he is most confident in Meta Platforms, where he expects 20% earnings growth and sees AI helping improve ad targeting. He is also positive on chip makers, arguing that analysts are still treating them as cyclical companies even though he believes their earnings have become more durable.
Among semiconductor names, Miller currently prefers Micron. He told MarketWatch that Korean chip makers SK Hynix and Samsung Electronics may trade at lower valuations, but said he believes that discount is warranted because of what he sees as weaker corporate-governance standards in that market.
This story draws on original reporting from MarketWatch.