Alphabet exceeds estimates with cloud gains, sees increased AI losses

Alphabet Reports Positive Earnings Amid Growing Cloud Business

Alphabet, the parent company of Google, released its quarterly earnings after the bell on Tuesday, surpassing analysts' predictions for both revenue and earnings per share. The company's cloud business marked a significant milestone by generating over $1 billion in operating profit for the first time. For the quarter, Alphabet reported earnings per share (EPS) of $1.89 on revenue of $84.7 billion. Analysts had estimated an EPS of $1.85 on revenue of $84.3 billion, as per data from Bloomberg. This represents a substantial increase from the same period last year, with EPS rising from $1.44 and revenue from $74.6 billion.

Advertising revenue also exceeded expectations, totaling $64.6 billion against the anticipated $64.5 billion, an improvement from $58.1 billion the previous year. Conversely, YouTube ad revenue fell short, bringing in $8.66 billion compared to the expected $8.95 billion. Following the announcement, Alphabet’s stock remained flat.

Cloud Business on the Rise

Alphabet's cloud segment reported revenue of $10.35 billion and operating income of $1.17 billion, beating analyst expectations of $10.1 billion in revenue and $982.2 million in operating income. This is a notable increase from the $8 billion in revenue and $395 million in operating income reported in Q2 2023. Year to date, Alphabet shares have climbed 30%, outperforming rivals Microsoft and Amazon, which have seen increases of 18% and 22%, respectively. All three tech giants are heavily investing in advancing their generative AI technologies, primarily through extensive data center developments to support the AI models they offer on their cloud platforms.

Substantial Investments in AI

During the second quarter, Alphabet revealed it spent $2.2 billion on developing AI models within its DeepMind and Google Research divisions, doubling the $1.1 billion spent in Q2 2023. Despite these investments, the timeline for AI contributing significantly to Google's Cloud revenue, or its ad segment, remains uncertain. Jefferies analyst Brent Thill noted that most companies are still in the pilot phase with AI, predicting material revenue from AI will more likely emerge around 2025-26.

Challenges and Adjustments in AI Integration

Google is still navigating challenges with its AI feature, Overview, which appears at the top of search result pages. Since its rollout in May, users have reported inaccuracies in the responses, prompting Google to reduce some generative AI functionalities. As it continues to spend on AI, Alphabet has also been downsizing in other areas, including employee headcount. The company reported having 179,582 employees in Q2, a decrease from 181,798 in the same period last year.

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