Alphabet Inc. faced a significant blow as its shares plummeted by the most in a year on Wednesday following the release of its quarterly earnings report, which revealed weaker-than-expected profit in its cloud computing unit. This has raised concerns about Alphabet’s competitive standing in the cloud computing market, which is considered pivotal to its future success.
As Google’s flagship search business matures, investors have been looking to the cloud unit to spearhead growth. However, the cloud unit reported operating income of $266 million, falling significantly short of the estimated $434 million, igniting worries about Alphabet’s ability to catch up with cloud computing giants such as Amazon.com Inc. and Microsoft Corp.
Max Willens, an analyst with Insider Intelligence, emphasized the unpredictable nature of the cloud computing business, stating, “Cloud computing is a much lumpier business than advertising and one where Google is facing stiff competition. While the traction it has among AI startups may bear fruit in the long run, it is not currently helping Google Cloud enough to satisfy investors.”
Alphabet’s shares took a hit, dropping as much as 8.9% to $126.40 in New York, marking the most substantial decline since October 2022. This downturn follows a promising year, during which the shares had gained 57% up to the previous day’s close.
Ruth Porat, Alphabet’s President who is currently serving as the company’s acting Chief Financial Officer, attributed the cloud unit’s disappointing performance to some customers’ cost-cutting measures.
Nevertheless, Alphabet’s overall earnings report for the third quarter was generally strong. The company reported sales of $64 billion, surpassing the analysts’ consensus of $63 billion. The net income amounted to $1.55 per share, surpassing Wall Street’s estimate of $1.45 per share.
The search advertising business, where Google holds a dominant position, reported revenue of $44 billion, exceeding the average analyst projection of $43.2 billion. However, Google’s leadership must contend with challenges stemming from the rise of generative AI chatbots that offer more conversational responses to user queries.
Despite the cloud unit’s struggles, Alphabet’s leadership has affirmed their commitment to operating more efficiently and investing in emerging opportunities such as artificial intelligence. CEO Sundar Pichai stated, “We’ll do everything that is needed to make sure we have the leading AI models and infrastructure in the world, bar none.”
Additionally, Alphabet’s ongoing legal battle with the U.S. Department of Justice, concerning allegations of search market power abuse, has contributed to the uncertainty surrounding the company’s future. Analyst Evelyn Mitchell-Wolf from Insider Intelligence noted that the outcome of the trial could influence investor confidence in the sustainability of Google’s business model.
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On a more positive note, YouTube reported $8 billion in revenue, surpassing the average estimate of $7.8 billion. This indicates that the video-sharing platform is benefiting from the rebound in digital advertising spending.
Alphabet’s Other Bets, which encompass moonshot projects like Waymo (self-driving cars) and Verily (life sciences), generated $297 million in revenue but incurred a $1.2 billion loss, in line with analysts’ projections. Despite the headwinds facing its cloud unit, Alphabet continues to explore new avenues for growth and innovation beyond its core businesses.
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