Google’s parent company Alphabet made a pretty sizeable $77 billion between the months of July-September this year. The revenue that Alphabet has reported mostly comes from its advertising services, and this, unfortunately, is not sitting well with its shareholders.
Google’s cloud computing division has announced a profit that falls short of expectations, sparking concerns about the company’s standing in a market that holds significant importance for its future. Following this announcement, Alphabet’s shares saw a drop of up to 7.2 per cent during late trading.
Google dominated search. What next?
As Google’s dominant search business matures, investors have been looking to the cloud unit to drive growth. However, the unit reported operating income of $266 million, failing to meet the estimated $434 million.
For some time now, Google has been trailing behind Amazon.com Inc. and Microsoft Corp. in the cloud computing market, where companies provide server space and software to enterprise clients.
Although Google Cloud achieved profitability for the first time earlier this year and has been attracting business from artificial intelligence startups, its performance in the most recent quarter did not meet expectations. This has led to concerns that the gap between Google and its rivals is widening.
Alphabet’s President, Ruth Porat, mentioned in a press interview that the cloud unit’s sales were impacted by cost-cutting measures taken by some of its customers.
Google is still in a robust position, but needs a gameplan
Despite this cloud setback, the overall financial report for the third quarter appeared robust. Alphabet reported third-quarter sales, excluding partner payouts, at $64 billion, exceeding analysts’ predictions of $63 billion. Net income per share was $1.55, surpassing the $1.45 estimate from Wall Street.
The company’s search advertising segment also performed well, bringing in $44 billion in revenue, outpacing the average analyst projection of $43.2 billion.
However, Google’s dominance in the search market faces new challenges from generative AI chatbots that provide more conversational responses to user queries. Companies like Microsoft, supporting Open AI Inc.’s ChatGPT, are vying with Google in this space, prompting concerns that Google may have been slow to adapt to the market shift.
Porat and Alphabet’s CEO, Sundar Pichai, expressed their commitment to operating more efficiently, with Porat mentioning a “slower pace of headcount growth” as part of these efforts. They emphasized their dedication to investing in opportunities such as artificial intelligence, aiming to lead in AI models and infrastructure.
Traditional search in trouble
Alphabet’s ongoing legal battle with the US Department of Justice over alleged search market power abuse is also affecting investor confidence. Evelyn Mitchell-Wolf, a senior analyst with Insider Intelligence, stated that “any outcome should influence investor confidence in the longevity of the Google business model.”
On a positive note, YouTube reported $8 billion in revenue, surpassing analysts’ average estimate of $7.8 billion. Despite being a drag on Alphabet’s performance in recent quarters, YouTube’s results indicate that it is benefiting from the broader recovery in digital advertising spending.
Alphabet’s Other Bets, which encompasses moonshot projects like Waymo’s self-driving car initiative and Verily’s life sciences unit, generated $297 million in revenue while incurring a loss of $1.2 billion, aligning with analysts’ expectations.
Alphabet’s shares experienced a decline, falling to as low as $128.80 in late trading, after closing at $138.81. The company’s shares have seen a 57 per cent increase so far this year.