Alphabet Inc., the parent company of Google, reported its fiscal second-quarter earnings after the market closed on Tuesday, surpassing analysts’ expectations on both revenue and profit. This positive outcome was largely driven by the continued growth of its cloud computing business, which achieved a significant milestone by surpassing $1 billion in operating profit for the first time.
For the quarter, Alphabet reported earnings per share (EPS) of $1.89, outperforming the anticipated $1.85 per share. The company’s total revenue came in at $84.7 billion, slightly above the forecasted $84.3 billion, according to data compiled by Bloomberg. This represents a significant year-over-year increase, with earnings per share rising by 31% from $1.44, and revenue growing by 14% from $74.6 billion in the same period last year.
Advertising revenue, a cornerstone of Alphabet’s business, also saw a notable rise, reaching $64.6 billion compared to analysts’ expectations of $64.5 billion and an increase from $58.1 billion the previous year. However, YouTube’s advertising revenue did not meet forecasts, generating $8.66 billion against an expected $8.95 billion, highlighting a shortfall in what has traditionally been a strong growth area for the company.
Despite the strong earnings report, Alphabet’s stock saw a decline of approximately 3% in pre-market trading on Wednesday. This drop may reflect investor concerns over specific segments not meeting expectations, or broader market reactions.
A significant highlight of the report was the performance of Google Cloud, which generated $10.35 billion in revenue and $1.17 billion in operating income. These figures surpassed the analyst projections of $10.1 billion in revenue and $982.2 million in operating income. The cloud segment’s performance was also a marked improvement from the $8 billion in revenue and $395 million in operating income reported in the second quarter of 2023.
Year-to-date, Alphabet shares have risen by 30%, outpacing competitors like Microsoft and Amazon, whose shares have increased by 18% and 22%, respectively. This growth comes amid a substantial investment in developing generative AI capabilities, a key area of focus for all three tech giants. These investments include significant spending on data centers needed to power the AI models offered through their cloud platforms.
In the second quarter, Alphabet disclosed that it had invested $2.2 billion in developing AI models across its DeepMind and Google Research divisions, doubling the $1.1 billion spent in the same quarter of the previous year. However, the timeline for these AI investments to translate into tangible revenue for Google’s Cloud and advertising segments remains uncertain. Jefferies analyst Brent Thill noted in a recent client report that it is “still too early to count on AI benefits,” with significant revenue impacts likely not emerging until 2025-26.
Google is also navigating challenges in its AI initiatives, particularly with its new AI-driven feature in Google Search, known as AI Overview. Launched in May, this feature provides generative AI responses at the top of search results. However, it quickly faced criticism due to inaccuracies, including famously erroneous advice such as suggesting users eat rocks or add glue to pizza. Following these issues, Google scaled back some of the AI functionalities to address the concerns.
While advancing its AI efforts, Alphabet has also been implementing cost-cutting measures, including reductions in its workforce. The company reported a headcount of 179,582 employees in the second quarter, down from 181,798 in the same quarter the previous year.
Overall, Alphabet’s strong financial performance in the second quarter highlights both the opportunities and challenges it faces as it navigates the evolving landscape of technology and digital advertising. The company’s continued investment in AI and cloud services indicates a forward-looking strategy, although the benefits of these investments may take time to fully materialize.
