Alphabet, Google’s parent company, reported a substantial growth in its cloud business by 35 per cent in the third quarter, thanks to its significant investments in artificial intelligence (AI) which appear to be “bearing fruit”. Traditional search business leaped 12 per cent alongside YouTube ad revenues, amid increased spending related to the US elections.
Following Tuesday’s results, Alphabet’s shares recorded nearly a 6 per cent jump in post-market trading. Amazon and Microsoft, leading firms in the cloud space, also saw a boost, with their shares rising by about 1 per cent after the close of the trading day.
Matt Britzman, a senior equity analyst at Hargreaves Lansdown, noted that Alphabet’s earnings were impressive, and did not disappoint. The robust growth in its cloud business underlines the continued position of leading cloud suppliers in the AI revolution.
While Google has been viewed as lagging behind its Big Tech competitor, Microsoft, in the AI terrain, it has been stepping up its efforts, enhancing its Gemini AI chatbot and strengthening its AI-driven Search.
Alphabet CFO, Anat Ashkenazi, in her maiden analyst call, affirmed the firm’s commitment to investing heavily in AI, indicating an anticipated rise in capital expenditure in 2025 compared to the present year.
At $13 billion, Alphabet’s capital spending shot up by 62 per cent in the third quarter, with expectations of a similar trend in the next quarter.
Analysts have commended Alphabet on its Q3 performance against the backdrop of lower expectations. They added that its budding cloud business could gradually compensate for the decelerating ad business.
Google’s long-standing preeminence in the digital ads market is now being challenged by Amazon and TikTok, which are attracting a significant number of advertisers. There’s also increasing regulatory pressure on Google’s Search business.
Nevertheless, Google’s cloud business experienced the highest growth in two years, rising to $11.35 billion, as firms doubled their cloud spending which is crucial for AI technologies, surpassing analysts’ estimation of $10.86 billion.
Bob O’Donnell, President of TECHnalysis Research appreciated Alphabet’s recent quarter performance and stated that the growth in Google Cloud amid a decline in Search reiterates the escalating significance of cloud revenues and the firm’s ongoing process to diversify its revenue base.
Google has introduced advertisements in AI Overviews, utilising generative AI to summarise and present succinct information derived from various sources for search queries. Feedback from users suggests that Google’s latest AI tools are performing better than their predecessors, representing a significant development. This comes after the feature faced backlash earlier this year for providing incorrect responses, including a pizza recipe that erroneously included glue as an ingredient.
Meanwhile, Alphabet exceeded projected profit margins with earnings of $2.12 per share, a clear surpassing of the average market prediction of $1.85 as per LSEG reports.
“A slight increase in revenue was observed due to the bump in election-related advertising expenditure in the third quarter, which was considerably noticeable in YouTube Ads”, according to Philipp Schindler, Google’s chief business officer. This announcement was made during a post-earnings call. Snap, another company heavily reliant on advertising, also delivered good news for its shareholders, boasting superior than predicted quarterly revenue and user growth, causing a 6% share increase in after-hours trading.
Alphabet’s digital advertising sales, its largest revenue stream, rose to $65.85 billion, marking a 10% increase in the third quarter. However, this growth rate did witness a reduction compared to the second quarter.
Looking forward, Angelo Zino, senior equity analyst at CFRA Research, anticipates Google potentially losing its ad market share in the next two to three years. He stated, “Increasing competitive pressures are inevitable as we shift towards a more AI-driven market”.
According to eMarketer’s data, Google’s US search advertising revenue share could fall below fifty per cent for the first time in almost two decades next year. In contrast, Amazon’s share is projected to rise to 24% from the current 22%. Alphabet recently reported its total revenue climbed by 15% to $88.27 billion during the July-September period, surpassing analyst average estimates of $86.30 billion as per LSEG data. Alphabet’s timely smartphone launch this year played a pivotal role in this revenue boost. – Additional details have been provided by Reuters.