Third quarter profits, sales, and cloud business all exceeded Wall Street expectations
“Successful in converting AI capabilities into sales growth”
AI search competition and risk of separation of search business remain after monopoly ruling
Photo = REUTERS Google’s parent company, Alphabet, achieved performance that exceeded Wall Street’s expectations as its cloud business grew rapidly despite a series of recent bad news. ·
Alphabet’s stock price is trading at $179.12, up 5.6% in pre-market trading on the 30th (local time).
Alphabet reported the previous day that it earned $2.12 in profit per share and $88.27 billion (KRW 121.55 trillion) in sales for the quarter ended September. This significantly exceeded Wall Street’s expected profit per share of $1.84 and also significantly exceeded the sales forecast of $86.4 billion. It significantly exceeded last year’s sales of $76.7 billion and profit per share of $1.55.
What is encouraging is that cloud business sales surged 35% from the previous year to $11.35 billion (KRW 15.63 trillion). This was the highest growth rate in eight quarters (two years) and exceeded analysts’ consensus of $10.88 billion.
Google’s cloud business is smaller than that of Amazon Web Services (AWS) or Microsoft. Its share of total sales remains at 13%. A year ago it was 11%.
Angelo Gino, senior equity analyst at CFRA Research, said Google’s cloud business growth is likely to outpace that of Microsoft and Amazon.com.
Amazon’s cloud business, AWS, accounted for 18% of total sales last quarter, and Microsoft’s intelligent cloud division, including Azure, generates 44% of total sales.
“The rapid growth of Google’s Cloud business this quarter reflects the recognition that Google’s dealmakers are seeing AI capabilities as a key driver,” said Bob O’Donnell, president and principal analyst at Technalysis Research.
MScience analyst Charles Rogers said that Google Cloud is differentiating itself from Azure and AWS by focusing on powerful tensor processing units (TPUs: AI custom chips) that have less AI capacity than competitors and improving security.
Gil Luria, head of technology research at DA Davidson, also pointed out, “Google’s cloud business is a key area in which Google was able to convert its AI capabilities into sales growth.”
Like its competitors, Alphabet is investing a lot of money in self-generated AI technology. Capital spending in the third quarter totaled $13.06 billion, exceeding analysts’ expectations of $12.66 billion. The company spent $13.2 billion on capital expenditures in the previous quarter and $8.06 billion a year ago.
Part of that is strengthening its search business to compete with Microsoft-backed OpenAI. It is also investing heavily in its cloud business and announced that it will invest billions of dollars in opening data centers around the world.
Anat Ashkenazi, who replaced Ruth Porat as the company’s new finance chief, said Alphabet would spend more on capital next year than it did this year.
Search sales, which account for more than half of Alphabet’s sales, amounted to $49.39 billion (KRW 68 trillion) in the third quarter, also exceeding the $49.02 billion expected by analysts.
Google has been the dominant search engine in the U.S. market for more than 20 years and has virtually no competitors that pose a threat. However, with the advent of generative artificial intelligence, a significant competitor is emerging. Following OpenAI’s ChatGPT, it was reported that Meta Platform is also developing an AI search engine for Facebook, Instagram, and WhatsApp.
Alphabet also faces ongoing antitrust issues. Following the U.S. court’s ruling recognizing Guggul’s monopoly in search services and text advertising, the U.S. Department of Justice is considering ways to separate the business.
Wedbush analyst Scott Devitt pointed out that AI search is a threat that could have a meaningful impact on Google’s business in the future. Nevertheless, Alphabet was evaluated as exceeding market returns and the target stock price was set at $205.
Alphabet shares are up 21% this year, slightly less than the S&P 500’s gain. Guest reporter Kim Jeong-ah [email protected]
