ii view: Alphabet cloud sales disappoint in AI leadership battle
Search engine advertising, YouTube, and even self-driving business Waymo. But is it all about artificial intelligence now? We assess prospects.
25th October 2023 11:35
by Keith Bowman from interactive investor
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Third-quarter results to 30 September
- Revenue up 11% to $76.7 billion
- Adjusted earnings per share up 46% to $1.55
Chief Executive Sundar Pichai said:
“I’m pleased with our financial results and our product momentum this quarter, with AI driven innovations across Search, YouTube, Cloud, our Pixel devices and more. We’re continuing to focus on making AI more helpful for everyone; there’s exciting progress and lots more to come.”
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ii round-up:
Google owner Alphabet Inc Class A (NASDAQ:GOOGL) reported forecast beating earnings under its drive to improve efficiency, but outlined sales for its data hosting cloud business below analyst hopes.
Third-quarter earnings of $1.55 per share surpassed estimates of $1.45, helped by 9% growth at its core advertising related businesses and cost cutting measures including previously announced job losses. Sales of $8.4 billion at its cloud operation, and potential host of AI software for customers, missed estimates of $8.6 billion, with year-over-year growth slowing to 22% from the previous quarter’s 28%.
Shares for the tech-mammoth fell around 7% in after-hours trading having come into this latest news up 57% year-to-date. That’s similar to fellow cloud data hosting business Amazon.com Inc (NASDAQ:AMZN) although far short of a 200% gain for AI computer chip maker NVIDIA Corp (NASDAQ:NVDA).
Profits of $266 million at its cloud business compared to a lost of $440 million this time last year, although remain small in comparison to the $23.9 billion made at its Google Services division and incorporating its core search advertising business.
Earlier this year Alphabet announced the coming together of part of its Google Research team with its DeepMind team in order to significantly accelerate its progress in AI. The move followed Windows software maker Microsoft and its 2022 assistance in launching the AI-based chatbot ChatGPT.
Broker Morgan Stanley reiterated its ‘overweight’ stance on Alphabet shares post the results. Fourth-quarter results are likely to be announced late January or early February.
ii view:
Headquartered in Mountain View, California, Alphabet during 2022 generated sales of just over $282 billion. It operates across the three divisions of Google Services, Cloud and Other Bets. Services includes its hardware, Google maps and Google play services, along with its core search advertising business including YouTube. Google Cloud competes against the likes of Microsoft Corp (NASDAQ:MSFT), Amazon, Oracle Corp (NYSE:ORCL) and International Business Machines Corp (NYSE:IBM), while its Other Bets division includes both its self-drive Waymo business and its life sciences unit Verily.
For investors, elevated costs and an uncertain economic outlook are likely keeping advertising spending at its corporate customers contained. Rivals for its businesses such as TikTok and Tesla are competing hard against its own You-Tube and Waymo units. The debate over appropriate tech valuations continues, while fears that AI could encroach on its Search Engine business now persist.
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More favourably, a diversity of both business types and geographical regions exists. A high focus on costs is now being made including rejigging its office portfolio. Ownership of the mobile phone Android operating system leaves it less depend than say Meta Platforms Inc Class A (NASDAQ:META) on the metrics set by Apple Inc (NASDAQ:AAPL) for advertising privacy, while its search engine business, at least for now, remains a go-to place for corporate advertising.
In all, and despite ongoing risks, a consensus analyst estimate of fair value sat at over $150 per share looks to give grounds for continued longer-term optimism.
Positives
- Alphabet dominates the digital advertising market
- Executing share buybacks
Negatives
- Uncertain economic outlook
- Technology giants remain under global government scrutiny
The average rating of stock market analysts:
Buy
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