Google Cloud revenue misses expectations despite AI boom
Alphabet, Google’s parent company, reports stronger than expected overall revenue but stock falls in after-hours trading.
Google’s performance in the latest quarter is robust overall, but investors seem less impressed. On Tuesday, Alphabet, Google’s parent company, released its third-quarter results, revealing stronger-than-expected total revenue. However, the earnings report showed a miss in the anticipated performance of Google Cloud, leading to a drop in Alphabet’s stock during after-hours trading.
Despite the dip in stock value, Alphabet’s third-quarter revenue reached $76.69 billion, marking an 11% increase compared to the previous year. While this exceeded analysts’ projections of $75.9 billion, the stumble in the Google Cloud segment affected investor sentiment.
YouTube, a part of Google’s ecosystem, managed to surpass expectations with a revenue of $7.95 billion, outperforming the predicted $7.81 billion. Although YouTube has faced challenges in competing with platforms like TikTok, the company reported a significant uptick in daily views for Shorts, its short-form video feature designed to rival TikTok. Views on Shorts climbed to 70 billion per day, up from 50 billion at the start of the year.
During discussions with investors, Sundar Pichai, the CEO of Alphabet, unveiled upcoming enhancements for Shorts. These include the introduction of AI-powered tools for video editing, as the company continues its efforts to fortify its position in the evolving landscape of short-form content.
Despite the overall gains, Google Cloud revenue fell short at $8.41 billion, compared to the anticipated $8.64 billion. This has raised concerns among investors, suggesting that the company may be at risk of lagging further behind competitors like Amazon and Microsoft, both significant players in the cloud-computing domain. However, it’s crucial to note that this setback isn’t reflective of the entire industry, as Microsoft’s Azure experienced rapid growth in the third quarter, contributing to higher-than-expected revenue and profit for the company.
Recent reports from Alphabet underscore the company’s emphasis on artificial intelligence (AI), a technology it has long championed and incorporated into various tools such as Search. Sundar Pichai, in a statement, credited the overall growth this quarter to Alphabet’s extensive integration of artificial intelligence across nearly all sectors.
“We’re committed to advancing AI to make it more beneficial for everyone. There is noteworthy progress, and we anticipate more in the future,” Pichai commented. Despite the revenue miss, Cloud revenue still exhibited a 22% year-over-year increase.
Nevertheless, this shortfall has tempered some of the enthusiasm surrounding AI as a potential savior for Alphabet, especially considering the challenges faced by its advertising revenue in recent years amid broader economic uncertainties. This development follows a period when Google Cloud surpassed expectations, achieving profitability in the first quarter of this year, marking a significant milestone since its inception in 2008.
According to Max Willens, a senior analyst at the market research firm Insider Intelligence, the landscape of cloud computing presents a challenging terrain for Google, unlike the more stable advertising sector. While Google’s appeal to AI startups holds potential in the long term, it currently falls short of satisfying investor expectations due to intense competition in the cloud computing market.
The economic challenges affecting Alphabet’s primary revenue source, advertising, are compounded by the scrutiny of a significant antitrust lawsuit filed by the US government, accusing the company of monopolizing online search. This legal battle continues, adding another layer of uncertainty for investors.
In response to the broader economic downturn, Alphabet has implemented various cost-saving measures throughout the year. In January, the company announced a workforce reduction of over 12,000 jobs, equivalent to 6% of its global employees. Subsequently, in September, additional job cuts were made in the recruiting segment, accompanied by a reduction in hiring activities. An internal memo in March also revealed the elimination of certain employee perks. Recently, Google downsized its Waymo self-driving car subsidiary and Verily, its biotech business.
Beyond internal restructuring, Alphabet has witnessed changes in its executive leadership. The latest financial report, released on Tuesday, is the first since the announcement of Chief Financial Officer Ruth Porat’s departure. She will be assuming the newly created role of ‘president and chief investment officer.’
