TL;DR:
- Google Cloud’s Q3 revenue increased by 22.5% to $8.41 billion.
- However, this missed Wall Street estimates of $8.6 billion and marked the slowest growth since Q1 2021.
- Alphabet’s CFO attributed this to customer optimization efforts, indicating reduced cloud spending.
- Microsoft’s strong cloud revenue growth suggests increasing competition in the AI space.
- Google is still searching for a standout AI application.
- Alphabet surpassed expectations in total revenue, earnings per share, and net income.
- The disappointment in Google Cloud’s performance raises questions about its competitiveness in the cloud market.
Main AI News:
Alphabet, the parent company of Google, faced a bit of turbulence in the third quarter as its cloud division, Google Cloud, missed Wall Street’s revenue estimates, causing the company’s shares to dip by more than 5% in after-hours trading on October 24th.
Google Cloud reported a 22.5% increase in revenue compared to the previous year’s third quarter, reaching $8.41 billion. While this is still a substantial figure, it fell short of the expected $8.6 billion and marked the division’s slowest growth since Q1 2021. Alphabet’s CFO, Ruth Porat, acknowledged the robust growth of Google Cloud “across geographies, industries, and products.” However, she also highlighted that the slower-than-anticipated expansion rate “reflects the impact of customer optimization efforts,” suggesting that some customers are tightening their belts when it comes to cloud spending.
This performance stands in contrast to the optimism expressed by Alphabet’s CEO, Sundar Pichai, in the previous quarter. Pichai had proudly mentioned that “more than 70% of gen AI unicorns are Google Cloud customers” and touted Google’s “AI-optimized infrastructure as a leading platform for training and serving generative AI models.” However, it appears that the competition, particularly Microsoft, is gaining ground in the AI race. Microsoft reported a 29% increase in cloud revenue in the recent quarter, solidifying its position as a formidable competitor.
Rohit Kulkarni, managing director at Roth MKM, described Google as the “godfather of AI” but noted that they are still searching for the “killer AI app.” While Alphabet continues to integrate AI into its products, from the search engine to Workspace tools, it seems that there is room for growth and development in this area. Pichai himself acknowledged this by stating, “We’re continuing to focus on making AI more helpful for everyone; there’s exciting progress and lots more to come.”
Despite the disappointment in Google Cloud’s Q3 performance, Alphabet as a whole managed to beat estimates in several key financial areas. Total revenue reached $76.69 billion, surpassing the expected $75.96 billion. Adjusted earnings per share came in at $1.55, exceeding the estimated $1.44. Net income also outperformed expectations, reaching $19.69 billion compared to the estimated $18.52 billion. Google’s advertising business reported $59.7 billion in revenue, marking a 9% increase from the previous year. However, Google Cloud’s sales fell short of the estimated $8.6 billion, reaching $8.41 billion. YouTube’s ad revenue also beat expectations, reaching $7.95 billion compared to the estimated $7.81 billion.
Conclusion:
Google Cloud’s Q3 results falling short of expectations, despite overall strong financial performance for Alphabet, suggest that the cloud market is becoming increasingly competitive. As Google continues to seek a breakthrough in AI applications, it faces challenges in maintaining its position in the cloud industry. Investors and industry watchers will be closely monitoring future developments in this rapidly evolving market.
