Alphabet's YouTube Slowdown And OpenAI's Search News Eclipsed The AI Prospects

Last Tuesday, Alphabet Inc GOOG GOOGL kicked off Big Tech’s earnings season by reporting its second quarter financials. While its top and bototm line surpassed Wall Street estimates due to the strength of Search ads and continued cloud growth, YouTube advertising revenue came short due to tough competition for ad dollars. Shares fell with fears that rising AI infrastructure investments would continue to squeeze margins.

Second quarter highlights

Driven by search as well as cloud, which surpassed $10 billion in quarterly revenues and $1 billion in operating profit for the first time, revenue grew 14% YoY to $84.74 billion, suprassing LSEG’s $84.19 billion consensus estimate.

YouTube advertising brought in $8.66 billion, which was short of StreetAccount’s $8.93 billion.

On the other hand, Google Cloud revenue brought in $10.35 billion, surpassing StreetAccount’s estimate of $10.20 billion.

Advertising business continued to grow, although at a slower pace compared to the first quarter, with revenue reaching $64.62 billion, growing from last year’s comparable quarter when it amounted to $58.14 billion.

“Other Bets” unit that is home to the self-driving car company Waymo, brought in $365 million, growing from last year’s comparable quarter when it amounted to $285 million.

With traffic acquisition costs of $13.39 billion coming in lower than StreetAccount’s $13.54 billion, net income also grew from last year’s comparable quarter when it amounted to $18.4 billion, or $1.44 per share to $23.6 billion, or $1.89 per share.

The AI story remains vague

While Alphabet continues to spend billions to build its AI capabilities with majority of capital expenditures going towards servers and data centers, CEO Sundar Pichai sidestepped to answer when will all this spending pay off in actual revenue. Pichai added that when it comes to such long-term bets, it is better to overinvest rather than risking to fall behind. Alphabet’s latest report did not reveal how much Google’s AI investments are contributing to its bottom line.

On the other hand, Microsoft Corporation MSFT- backed OpenAI announced a a search engine of its own on Thursday. With the AI-powered search engine, Microsoft promises to ramp up pressure on Google. With the help of OpenAI, Microsoft could challenge Google’s dominance in the search arena, as OpenAI promises to give consumers new ways to serach for information online. Upon the news from Microsoft-backed OpenAI, Alphabet shares dropped more than 3%. 

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