Alphabet, the parent company of Google, has revealed an 11% increase in revenue during the third quarter, marking a significant turnaround fueled by a resurgence in advertising. The impressive figures have propelled the tech giant into double-digit expansion territory for the first time in over a year. While this positive news has many excited, Alphabet’s shares saw a dip of almost 7% in extended trading due to a cloud business that fell short of analysts’ expectations.
Here’s a breakdown of the key highlights from Alphabet’s Q3 earnings report:
Earnings per share: $1.55 per share, exceeding the $1.45 per share that was expected by LSEG (formerly known as Refinitiv).
Revenue: $76.69 billion, outperforming the $75.97 billion expected by LSEG.
The report also provided additional numbers:
- YouTube advertising revenue: Surged to $7.95 billion, beating the anticipated $7.81 billion (according to StreetAccount).
- Google Cloud revenue: Came in at $8.41 billion, slightly below the expected $8.64 billion (according to StreetAccount).
- Traffic acquisition costs: Totaled $12.64 billion, almost in line with the $12.63 billion estimate (according to StreetAccount).
The outstanding double-digit revenue increase is a remarkable achievement for Alphabet, especially considering the four previous quarters saw only single-digit growth. The growth in Google’s core advertising revenue is a significant factor behind this success, primarily due to economic softening last year and increased competition from platforms like TikTok.
In specific numbers, Alphabet reported advertising revenue of $59.65 billion for the third quarter, up from $54.48 billion the previous year. Notably, YouTube advertising revenue exceeded expectations by reaching $7.95 billion. During an investor call, Sundar Pichai, CEO of Alphabet, shared the impressive growth of Shorts, YouTube’s TikTok competitor, which now boasts 70 billion daily views, a substantial increase from the more than 50 billion daily views at the beginning of the year.
Despite these gains, Alphabet’s cloud revenue did not meet analysts’ estimates, amounting to $8.41 billion, missing the mark by a little over $20 million. The cloud business is a key focus for Alphabet as it competes with Amazon Web Services and Microsoft Azure. Its growing importance is evident, particularly with the rise of generative artificial intelligence (AI) and the increased use of public cloud for resource-intensive workloads.
While the cloud business fell short, it still achieved an impressive 22% growth from the previous year. This is twice the expansion rate of the company as a whole. It’s worth noting that the cloud business also transitioned from a loss of $440 million during the same period the previous year to an operating profit of $266 million.
However, many experts believe that for Alphabet’s stock to reach even greater heights, the cloud business must become more profitable. Some have expressed concerns about its current position, labeling it as a “third-rate cloud platform” and highlighting the need for it to become more financially successful.
Ruth Porat, Alphabet’s finance chief, explained that while cloud growth remains robust across various areas, the expansion rate reflects the impact of “customer optimization efforts.” This phrase typically refers to clients reining in their spending. It’s also noteworthy that Porat is set to step down from the CFO role after eight years, taking on the new role of chief investment officer.
One of the key drivers of Google’s recent focus on its cloud business is the introduction of generative AI technology, similar to OpenAI’s ChatGPT chatbot. Google is racing to incorporate generative AI into various products and is currently testing it within core search. The potential impact of generative AI on Google’s search and advertising business is significant, as it could change how people search for information online.
Additionally, Alphabet’s “Other Bets” category, which includes businesses such as Waymo (self-driving cars) and Verily (life sciences), reported revenue of $297 million, up from $208 million the previous year. However, it reported a loss of $1.19 billion, a slight improvement from the $1.23 billion loss the year before.
Throughout this year, Google has been on a cost-cutting spree following years of unrestrained growth. They announced the elimination of 12,000 jobs in January, affecting around 6% of their full-time workforce. Last month, they also reduced the number of positions in their recruiting organization.
In the third quarter, Google carried out focused layoffs in various business divisions. The news division, for example, saw an estimated 40 to 45 employees lose their jobs. Moreover, Google’s self-driving car unit, Waymo, laid off more employees. Despite this streamlining, the company has achieved remarkable growth, with Alphabet shares up 47% this year, surpassing the S&P 500’s performance of around 11% during the same period.
Image Source: Google
