Cloud revenue miss drags on Alphabet's stock, despite strong results overall

Cloud revenue miss drags on Alphabet’s stock, despite strong results overall

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Alphabet Inc., the parent company of Google LLC, reported double-digit revenue growth for the first time in over a year today as it delivered its third quarter financial results. The expansion was driven by a rebound in advertising, but the company’s stock fell more than 6% in extended trading as its cloud computing business missed revenue expectations.

The company delivered earnings before certain costs such as stock compensation of $1.55 per share, beating Wall Street’s target of $1.45. Revenue came to $76.7 billion for the quarter, up 11% from a year earlier and ahead of the $75.9 billion analyst target. All told, the company reported net income of $19.7 billion, rising from just $13.9 billion a year earlier.

The improved revenue growth came after four quarters in which Alphabet reported only single-digit expansion. Google had struggled over the past year, with its core advertising business weakening due to the poor economy and increased competition from platforms such as TikTok.

However, the advertising business put in a stellar performance during the third quarter, with revenue rising to $59.6 billion from just $54.5 billion a year earlier, edging past Wall Street’s target of $59.2 billion. Within the segment, YouTube advertising showed its strength with revenue of $7.9 billion, comfortably ahead of the $7.8 billion forecast. In a conference call, Alphabet Chief Executive Sundar Pichai (pictured) told analysts that YouTube’s TikTok competitor Shorts now counts more than 70 billion daily views, up from 50 billion at the start of the year.

Despite the improved revenue growth, investors appear to have been disappointed by the lackluster performance of Google’s cloud computing business, which missed Wall Street’s expectations. The company reported cloud revenue of $8.41 billion, some way short of the $8.64 billion that analysts were looking for.

Alphabet has been investing heavily in its cloud computing business in recent years as it desperately struggles to catch up with rivals such as Amazon Web Services Inc. and Microsoft Corp. Now, with the surge of interest in generative artificial intelligence, the cloud unit has become even more important because most companies choose to run their biggesting computing workloads there.

It wasn’t all bad news, though. The cloud unit did at least grow by 22% from the same period a year earlier, double the rate of the company’s overall expansion. The business also delivered an operating profit of $266 million, swinging from a $440 million loss a year ago.

On the call, Alphabet’s chief financial officer Ruth Porat said the cloud revenue miss is the result of “customer optimization efforts”, which generally means that clients are reducing their spending. Porat, who has served in the CFO role for more than eight years, recently announced that she will step down from that job to become the company’s new chief investment officer.

In the Other Bets division, which includes businesses such as Verily Life Sciences and the Waymo self-driving car unit, Alphabet saw revenue rise from $208 million a year earlier to $297 million today. However, the division recorded a net loss of $1.19 billion, down slightly from the $1.23 billion loss it recorded a year earlier.

Over the last year, Alphabet has announced a series of cost-cutting measures to deal with the slowing growth it has faced. The most significant measures came in January when it announced it will eliminate 12,000 jobs, or roughly 6% of its total workforce. In the last month, it reportedly cut hundreds of recruitment staff. The company also reportedly laid off staff at Waymo.

Alphabet’s stock was up 47% in the year to date prior to today’s drop, well ahead of the overall S&P 500, which is up just 11% for the year.

Photo: Philippe Masse/Flickr

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