Strong cloud growth driven by AI workloads boosts Alphabet's stock

Strong cloud growth driven by AI workloads boosts Alphabet’s stock

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Shares of Google LLC’s parent company Alphabet Inc. gained more than 5% in extended trading today as the company delivered more than $8 billion in cloud revenue for the first time.

The company reported second quarter earnings before certain costs such as stock compensation of $1.44 per share, beating Wall Street’s estimate of $1.34 per share. Revenue for the period grew by 7% from a year earlier to $74.6 billion, ahead of the $72.82 billion consensus estimate. All told, Alphabet reported net income for the quarter of $18.37 billion, up from $16 billion a year earlier.

In a statement, Alphabet Chief Executive Sundar Pichai (pictured) insisted that “exciting momentum” is building across the company and its portfolio of products. “Our continued leadership in AI and our excellence in engineering and innovation are driving the next evolution of Search, and improving all our services,” he stated.

While investors were encouraged by the results, it is notable that the quarter just gone is the fourth in succession where the company has reported growth in the single digits, a far cry from earlier years. Alphabet is being hampered by a strong pullback in digital advertising spend that mirrors economic concerns. Most analysts agree that Alphabet probably won’t hit double-digit growth again until at least the fourth quarter.

But considering this backdrop, there was a lot to like about Alphabet’s latest report. The highlight was Google Cloud, the company’s public cloud infrastructure unit, which delivered more than $8 billion in revenue for the first time, up from $6.3 billion a year before. That represents a healthy revenue increase of 28%. More important, it’s clear that Google Cloud is really transforming into a profitable business at last. The company reported an operating income of $395 million in the quarter, up from a $590 million loss one year ago. It’s the second successive quarter in which Google Cloud has made a profit.

“With Google Cloud, we’ve been really embracing an open architecture,” Pichai said on a conference call with analysts. “We’ve embraced customers wanting to be multi-cloud when it makes sense for them.”

While discussing Google Cloud, analysts inevitably raised the topic of generative artificial intelligence and its impact on the business. In response to a question, Pichai stated that Google Cloud’s AI-optimized infrastructure is one of the industry’s leading platforms for training generative AI models. “More than 70 percent of gen AI unicorns are Google Cloud customers, including Cohere, Jasper, Typeface and many more,” the CEO revealed.

According to Pichai, the acceleration of AI trends will help Google Cloud to expand its total addressable market considerably and attract new customers to the platform. “The scale of investments that we can directly bring to cloud now – we have over 80 models across Vertex, Search and conversational AI – and we are taking all of them and translating them into deep industry solutions. I’m so excited about it,” Pichai said.

The importance of Alphabet’s AI efforts were illustrated in a recent report by the Wall Street Journal, which said Google co-founder Sergey Brin has been spotted at the company’s headquarters in Mountain View, California. He’s reportedly spending time with AI researchers on a secretive and large-scale AI project. Brin had hardly been seen at the company since he stepped down from his executive role at Alphabet in 2019.

Alphabet’s growing success in the cloud was tempered somewhat by the disappointing performance of Google’s ad business. Revenue there grow by just 3.3% from a year earlier to $56.29 billion. Within the segment, YouTube ads delivered above expectations with $7.67 billion in revenue, rising from $7.34 billion a year earlier. That was encouraging, as YouTube has faced increased competition in the short-form video space from rivals like TikTok.

Alphabet’s “Search and Other” business segment delivered sales of $42.63 billion, up from $40.69 billion a year earlier.

Finally, the company’s Other Bets segment, which includes operations such as the Verily life sciences unit and Waymo, the autonomous car business, saw revenue jump 48% to $285 million. Despite that, the segment remains unprofitable, generating an $813 million loss overall.

“The 7% revenue bump may not seem impressive at first glance, but it was pretty evenly spread across the company’s various businesses,” analyst Charles King of Pund-IT Inc. told SiliconANGLE. “In other words, there were no soft spots or areas of significant concern.”

In separate news today, Alphabet announced that its Chief Financial Officer Ruth Porat will quit her current role to become the company’s new president and chief investment officer – which is an entirely new position. Porat will continue as CFO while the company searches for a successor, Alphabet said.

King praised Alphabet for recognizing and rewarding Porat’s talent and capabilities. “In a so-called “innovative” industry, it is good to see that at least some tech companies ensure that female executives receive the respect and positions they clearly deserve,” he said.

Alphabet, along with Microsoft Corp., was the first of the mega-cap technology companies to deliver its latest earnings report. Facebook parent company Meta Platforms Inc. is expected to report on Wednesday, while Amazon.com Inc. and Apple Inc. are both due to report next week.

Prior to today’s jump, Alphabet’s stock was up 47% since the start of the year, compared to an overall gain of just 19% for the wider S&P 500.

Photo: Google

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