Alphabet Inc.’s overall business expanded faster than it had in more than a year during the third quarter, but shares were falling in Wednesday’s premarket action as the company’s cloud-computing business disappointed.
Google Cloud generated $8.4 billion in third-quarter revenue, below the FactSet consensus of $8.6 billion. While cloud-computing represents barely over 10% of Alphabet’s
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overall revenue, it’s a key area of focus for Wall Street—especially now that the cloud is seen as an early artificial-intelligence battleground.
“Cloud computing is a much lumpier business than advertising, and one where Google is facing stiff competition,” Max Willens, an analyst at market researcher Insider Intelligence, said in a report. “While the traction it has among AI startups may bear fruit in the long run, it is not currently helping Google Cloud enough to satisfy investors.”
During a conference call with analysts late Tuesday, Chief Financial Officer Ruth Porat said cloud growth “remained strong across geographies, industries and products,” but its rate of expansion “reflects the impact of customer optimization efforts,” a phrase that generally refers to clients cutting back on spending.
Alphabet Chief Executive Sundar Pichai, in response to an analyst’s question later about lower cloud spending, said, Google “leaned into it to help customers given some other challenges they were facing.” Pichai added that Google Cloud has shown momentum, and he’s seen signs that the unit’s performance will stabilize.
Alphabet’s results in the cloud contrasted with those from Microsoft Corp.
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which showed an acceleration in that part of the business.
Shares were down 6% in Wednesday’s premarket action.
Opinion: Microsoft and Alphabet results show Wall Street only cares about AI
The cloud miss overshadowed an overall beat on revenue and profit for the period.
Total revenue was $76.7 billion, compared with $69.1 billion a year ago. Sales minus total acquisition costs (TAC) came in at $64.1 billion, compared with $57.3 billion a year ago. Analysts surveyed by FactSet had expected on average net earnings of $1.46 a share on revenue of $75.96 billion and ex-TAC revenue of $63.1 billion.
Alphabet
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reported third-quarter net income of $19.7 billion, or $1.55 a share, compared with net income of $13.9 billion, or $1.06 a share, in the year-ago quarter. Analysts were looking for $1.45 a share.
Google’s total advertising sales climbed to $59.65 billion from $54.5 billion a year ago, edging analysts’ average expectations of $59.2 billion. YouTube ad sales rose to $7.95 billion from $7.07 billion a year ago and came in ahead of the $7.81 billion that analysts were modeling.
Investors and Wall Street are focused on how AI can be monetized. While Microsoft is selling its AI version of Bing, Google’s competing entry, Bard, is still being tested by users.
Alphabet is also ramping up AI initiatives to improve operational efficiency and productivity for 2023 and beyond. The company is using AI in its finance organization and analytics, but Alphabet did not break out AI revenue in Tuesday’s earnings report.
While Snap Inc.
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called out some advertiser caution after the start of the Israel conflict, Alphabet’s Porat said she had “nothing really to add” beyond that the company was supporting its workers in the Middle East, when asked by an analyst if Alphabet had seen any disruptions to the ad business as a result of the war.
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