Alphabet Shows It Will Fight For Its Place In The Cloud And AI World

Last Tuesday, Alphabet GOOGGOOGL reported its revenue returned to double digit growth after more than a year. But although its revenue and earnings both topped estimates, Google-parent stock dropped as cloud revenue fell short. The downward trend was a contrast compared to the rising trend the share prices of its competitors experienced, namely of Microsoft Corporation MSFT, Amazon.com Inc AMZN and Meta Platforms META. But today, the Google parent revealed it has followed the footsteps of Amazon by committing to a $2 billion investment in the AI startup, Antropic. Alphabet stock rose 1% during premarket trading.

Alphabet's AI Bet With Antropic

Last month, Amazon revealed it infused up to $4 billion into this promising AI startup. With the Google parent following its footsteps, the race between the tech giants to dominate the AI battlefield is heating up. Anthropic has developed Claude 2 which is said to have better guard rails than its large language model competitors, meaning it promises to dethrone ChatGPT that Microsoft-backed OpenAI developed.

Third Quarter Highlights

For the quarter ended on September 30th, Google-parent company reported revenue of $76.69 billion, topping LSEG’s estimate of $75.97 billion. Revenue rose 11%YoY which was the first double digit quarterly growth after fourth consecutive quarters of single-digit growth. Alphabet reported its net income rose to $19.7 billion, with earnings per share amounting to $1.55, topping LSEG’s consensus estimate of $1.45 per share. During last year’s comparable quarter, Alphabet reported a net income of $13.9 billion, or $1.06 per share.

Revenue Segmentation

Advertising revenue rose from last year’s comparable quarter when it amounted to $54.48 billion to $59.65 billion, but still came below analyst expectations as the segment weakened from previous quarter’s very strong performance due to the challenging macroeconomic climate as well as increased competition from TikTok. These results shattered the idea of resilience to a weakening economy that Wall Street expected from the world's largest digital advertising platform by market share. YouTube advertising contributed $7.95 billion to the revenue table, topping StreetAccount’s estimate of $7.81 billion but still showing a pullback from advertisers.

Google Cloud brought in $8.41 billion, falling short of StreetAccount’s estimate of $8.64 billion by more than $200 million. This shortfall was all it took to overshadow Google’s better-than-expected quarterly results as the company tries to catch up to Amazon and its AWS as well as to Microsoft and its Azure. Meanwhile, Microsoft reported that its Azure cloud revenue growth accelerated after two years of deceleration. Microsoft also reported that revenue from Azure alone rose 29% during the latest reported quarter, topping both CNBC’s and StreetAccount’s consensus estimates of 26%. Although Amazon reported that its AWS became more profitable as a widened operating margin delivered a higher-than-expected operating income, revenue of $23.06 billion slightly missed StreetAccount’s consensus estimate of $23.2 billion. But Amazon ended a six-quarter streak of revenue deceleration as AWS revenue grew 12% YoY but was barely faster compared to the second quarter. AWS still leads the cloud pack in terms of market share, but it was slowest grower in the latest reported quarter, with Microsoft's growth rate being more than double. But, Google’s cloud business still grew 22% YoY and turned from last year’s operating loss to an operating profit of $266 million.

With the development of generative AI, this business is only getting more and more important to Big Tech. Microsoft’s AI boost seems to have fueled its cloud business outpace Google and Amazon in the latest quarter so one could easily argue that Microsoft is going after Amazon after already taking the AI mantel from Google. But with its newest commitment to Antropic, Google showed it will fight for its place in the new tech era. The generative AI game has just begun. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.