Alphabet, Google’s parent company, saw its shares rise by 5% after announcing a 34% increase in third-quarter profits, primarily driven by rapid growth in Google Cloud and artificial intelligence (AI) services. These gains have eased investor concerns regarding Alphabet's substantial investments in AI, as the company and its tech competitors seek to lead this emerging field.
Key Highlights from Alphabet’s Third Quarter:
- Surging Cloud Revenues: Google Cloud revenue climbed 35% to $11.4 billion, with operating profits skyrocketing to $1.9 billion, up from $266 million a year prior. This rapid growth underscores Google’s progress in cloud services, even as it trails behind top competitors like Microsoft Azure and Amazon Web Services.
- Strong Overall Performance: Alphabet reported $88.3 billion in revenue for the quarter, a 15% increase, surpassing Wall Street’s estimate of $86.3 billion. Net income also exceeded expectations at $26.3 billion, up from $19.7 billion last year.
- Growing Demand for AI Solutions: CEO Sundar Pichai credited Alphabet's success to its focus on AI, with rising demand for specialized chips and Google’s AI-powered “Overviews” feature, which simplifies search by directly answering questions. Google continues expanding its AI infrastructure across the U.S., Thailand, and Uruguay to support this growth.
Despite robust performance in cloud and AI, Google Cloud remains third in market share, and competition with rivals like Microsoft is intense. Microsoft recently accused Google of “shadow campaigns” to gain an edge with regulators as both companies vie for clients and market dominance.
Other Business Achievements:
- Core Search and Advertising: Google’s search and advertising revenue rose by 10% to $65.9 billion. Despite the entry of AI-powered chatbots like ChatGPT, Google’s search engine remains resilient, thanks to innovations like its Gemini-powered AI Overviews, which allow users to get direct answers to complex questions.
- YouTube Success: YouTube’s revenue increased by 12% to $8.9 billion, driven by a mix of ad and subscription revenues. YouTube also reached a major milestone, surpassing $50 billion in ad and subscription revenue over the past year, partly due to sports content like the National Football League.
Alphabet’s shares have grown over 22% this year, making the company one of the world’s most valuable, with a $2.1 trillion market capitalization, only behind Apple, Nvidia, and Microsoft.
Investments in Future Technologies
This quarter, Alphabet significantly increased its capital expenditures (capex) to $13.1 billion, marking a 62% year-over-year rise. Much of this investment supports AI infrastructure, including data centres, networking equipment, and high-performance chips. Alphabet expects to continue investing in these areas, with capex projected to exceed $50 billion by year-end and increase further in 2025.
Challenges Ahead for Alphabet
While Alphabet is experiencing growth, it also faces challenges. New AI-driven competitors like ChatGPT and Anthropic’s Claude are changing the search landscape. Google has introduced Gemini-powered AI Overviews to remain competitive, integrating advertising into these features while cutting the computing costs per query by 90% over the last 18 months. Internally, AI is enhancing productivity by generating 25% of Google’s new code, later refined by engineers.
However, Alphabet could face structural changes after a U.S. Department of Justice (DoJ) antitrust ruling found Google’s search practices anti-competitive. Alphabet also recently lost an antitrust case involving its Google Play app store and is due in court for another DoJ case regarding its ad tech business.
Summary
Alphabet’s third-quarter results highlight the financial gains from Google’s strategic focus on cloud and AI. Strong growth in Google Cloud, steady advertising revenues, and YouTube’s success position Alphabet well, although competition and regulatory challenges lie ahead. With continued investment in cutting-edge AI and infrastructure, Google is poised to stay at the forefront of tech innovation.
Source: (FT.com)
