Alphabet Inc.’s cloud computing division reported lower-than-expected profits, sparking concerns about the company’s standing in a crucial market for its future. In premarket trading on Wednesday, Alphabet’s shares fell by 6.5%. As Google’s dominant search business matures, investors are pinning their hopes on the cloud division for growth. However, the unit reported an operating income of $266 million, falling short of the estimated $434 million.
For some time, Google has lagged behind Amazon.com Inc. and Microsoft Corp. in the cloud computing market, which involves companies offering server space and software to enterprise clients. Although Google Cloud turned a profit for the first time earlier this year and attracted business from artificial intelligence startups, its momentum didn’t meet expectations in the most recent quarter, raising concerns about the growing gap between Google and its competitors.
Cloud computing more irregular business than advertising
Max Willens, an analyst with Insider Intelligence, noted, “Cloud computing is a much more irregular 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.”
In early trading, before the New York exchanges opened on Wednesday, the company’s shares fell to $129.80, having previously closed at $138.81. Nevertheless, the shares have seen a 57% increase so far this year.
Alphabet’s President, Ruth Porat, mentioned in a press interview that the unit’s sales were affected by some customers’ cost-cutting. As the company continues to search for her replacement following her promotion, Porat is still serving as the company’s Chief Financial Officer.
Despite the cloud unit’s performance, the company’s overall results were robust. In the third quarter, sales, excluding partner payouts, reached $64 billion, surpassing the $63 billion predicted by analysts. Net income was $1.55 per share, compared to Wall Street’s estimate of $1.45 per share.
The company reported $44 billion in search advertising revenue, surpassing the average analyst projection of $43.2 billion.
While Google maintains its dominance in the search market, it faces new challenges from generative AI chatbots, which respond to user queries in a more conversational manner. Competing firms, including Microsoft, are challenging Google’s search leadership with this new technology.
Alphabet’s CEO, Sundar Pichai, and CFO, Ruth Porat, emphasized their commitment to operating more efficiently, with an emphasis on maintaining a slower pace of headcount growth. Their goal is to free up resources for investments in areas like artificial intelligence.
Benefiting from the broader recovery in digital advertising spending
Pichai told investors, “We’ll do everything that is needed to make sure we have the leading AI models and infrastructure in the world, bar none.” The ongoing trial with the US Department of Justice over alleged search market power abuse is also affecting Wall Street’s confidence in Google’s business model.
YouTube reported $8 billion in revenue, exceeding the average estimate of $7.8 billion, indicating that it is benefiting from the broader recovery in digital advertising spending. Alphabet’s Other Bets, including projects like Waymo and Verily, brought in $297 million in revenue while incurring a $1.2 billion loss, aligning with analysts’ projections.
