Alphabet's AI Investments Drive Cloud Sales and Boost Ad Business
Alphabet's AI investments lead to a 35% surge in cloud business and increased YouTube ad sales. Google's cloud business growth outpaces its ad business decline, showcasing the importance of cloud revenues. Alphabet's total revenue for the third quarter exceeded expectations, driven by strong performance in various segments.
Following this news, Alphabet's shares surged by nearly 6% in after-market trading, while Amazon and Microsoft, the leading cloud companies, saw a 1% increase in their shares after hours.
Alphabet exceeded revenue and earnings expectations for the third quarter, with its core Search business growing by 12% and revenue from YouTube ads also showing a significant increase. Matt Britzman, senior equity analyst at Hargreaves Lansdown, commented, "Alphabet is the first major tech name to report earnings, and it hasn't disappointed. Cloud growth was strong... which continues to support the argument that the major cloud providers are well-placed to benefit from the AI revolution."
Despite being perceived as lagging behind tech giant Microsoft in the AI race, Google has been enhancing its Gemini AI chatbot and improving its AI-powered Search capabilities. The company continues to make substantial investments in AI, with its new CFO, Anat Ashkenazi, stating that Alphabet's capital expenditures in 2025 would surpass this year's spending. In the third quarter, Alphabet's capital expenditure increased by 62% to $13 billion, with a similar trend expected in the fourth quarter.
Analysts noted that Alphabet's quarter appeared impressive compared to low expectations, highlighting the potential of its growing cloud business to offset the slowdown in its ad business. While Google's dominance in the digital ad market faces challenges from competitors like Amazon and TikTok, its cloud business experienced its fastest growth in eight quarters, reaching US$11.35 billion. This growth was attributed to enterprises increasing their cloud spending to support AI technologies.
Bob O'Donnell, president of TECHnalysis Research, remarked, "I do think it was an impressive quarter because the fact that Google Cloud could more than offset Search decline speaks both to the growing importance of cloud revenues and the fact that the company continues to diversify its revenue base." Google introduced ads in AI Overviews, leveraging generative AI to summarise content from various sources and provide concise search results, which users found more effective compared to previous tools.
Alphabet surpassed profit expectations, reporting earnings of US$2.12 per share, exceeding the market estimate of US$1.85. The company benefited from election-related ad spend in the third quarter, particularly in YouTube ads, as highlighted by Google's chief business officer, Philipp Schindler, during a post-earnings call. Meanwhile, social media platform Snap, reliant on advertising, also exceeded Wall Street targets for revenue and user growth, leading to a 6% increase in its shares in after-hours trading.
Alphabet's digital advertising sales, the largest portion of its revenue, grew by 10% to US$65.85 billion in the third quarter, although the growth rate slowed compared to the previous quarter. Analysts predict that Google may lose market share in the ad industry over the next few years as competition intensifies in the AI-driven market. Data from eMarketer suggests that Google's share of U.S. search advertising revenue is projected to drop below 50% next year for the first time in at least 18 years, while Amazon's share is expected to increase to 24% from 22% this year.
Alphabet's total revenue rose by 15% to US$88.27 billion in the July-September period, surpassing the average analyst expectation of US$86.30 billion. The company's decision to advance its smartphone launch this year contributed to the revenue growth, reflecting a positive outlook for Alphabet's future performance.
Alphabet's AI investments lead to a 35% surge in cloud business and increased YouTube ad sales.
Google's cloud business growth outpaces its ad business decline, showcasing the importance of cloud revenues.
Alphabet's total revenue for the third quarter exceeded expectations, driven by strong performance in various segments.
Source: REUTERS