Alphabet's Revenue Boosted by Cloud and Search Ads, But Shares Fall upon Margin Concerns

For the quarter, the company saw earnings per share of $1.89 on revenue of $84.7 billion. Analysts were anticipating earnings per share of $1.85 on revenue of $84.3 billion, according to data compiled by Bloomberg. That's a jump from the same period last year of 31% and 14%, respectively, when the company reported earnings per share of $1.44 on revenue of $74.6 billion.

Google Cloud saw its revenue increase by 29% year-over-year in the second quarter, reaching $10.35 billion, beating analyst expectations of $10.09 billion. Operating profit tripled to $1.17 billion, or nearly a 200% increase, up from $395 million in the same period last year.

This marks the first time that Google’s cloud division hit $10 billion while also achieving $1 billion in operating profit. During an earnings call on Tuesday, Google CEO Sundar Pichai said the company’s generative AI solutions for Cloud customers “already generated billions in revenues and are being used by more than 2 million developers.”

Source: Bloomberg

Google Advertising revenue topped $64.6 billion versus analysts' expectations of $64.5 billion, and up from $58.1 billion last year. Google Search & other revenue was US$48.5 billion, compared with the average analyst projection for US$47.6 billion.

YouTube Ad revenue, however, fell short, with the segment bringing in $8.66 billion, compared with analysts’ average estimate of US$8.95 billion. Of Alphabet’s various businesses, YouTube has been the most vulnerable to swings in the digital-ad market.

Previous analyses suggested that Google's core advertising business had weakened due to the economic slowdown in 2022 and intensified competition from TikTok. However, since reporting negative growth in the fourth quarter of 2022, Google advertising revenue has been steadily improving.

Additionally, Alphabet’s Other Bets — a collection of moonshot units that includes the life sciences business Verily and the self-driving car effort Waymo — brought in US$365 million in revenue while posting an operating loss of US$1.13 billion. That was steeper than analysts’ projection for a loss of US$1.07 billion. Alphabet has recently put pressure on its bets to spin off as independent startups, rather than becoming business units of their parent company.

Google once had a head start in the AI race because it developed much of the technology underpinning popular chatbots. Now, the company aims to prove that it can withstand competition from the likes of OpenAI and Microsoft.

In the second quarter, Alphabet's capital expenditure was $13.186 billion, exceeding the $12 billion from the first quarter. It also reported spending $2.2 billion building AI models across its DeepMind and Google Research organizations. That's up from $1.1 billion in Q2 2023. When exactly AI starts to generate revenue for Google’s Cloud business, let alone its ad segment, is still up in the air.

“It is still too early to count on AI benefits as most companies remain in pilot mode, and material AI revenue is more likely a 2025-26 event,” Jefferies analyst Brent Thill wrote in a recent client note ahead of Alphabet's earnings announcement.

“We’ve certainly seen the benefit of our strength in AI, AI infrastructure, as well as generative AI solutions for cloud customers,” Alphabet chief investment officer Ruth Porat said on a call with media. “There is no question customers are turning to us as they are building out their capabilities.”

Morgan Stanley analyst Brian Nowak raised the firm's price target on Alphabet to $210 from $195 and keeps an Overweight rating on the shares.

Wedbush analyst Scott Devitt thinks the setup remains positive heading, with its ad survey and agency commentary pointing to continued strength for Google Search. Wedbush expects a more modest sequential deceleration in Search growth and has increased conviction in spending intent for the full year, supported by its survey results. The firm has an Outperform rating on the shares with a price target of $205.

However, KeyBanc has pointed out that Alphabet still faces unresolved uncertainties, these include ongoing Department of Justice (DOJ) cases, the unknown duration of the capital expenditure cycle, and the upcoming U.S. presidential election.

"The reason the reaction to this print may be muted is due to comments that seemed to temper the pace of margin expansion" for the second half of 2024, Melius Research analyst Ben Reitzes wrote in a note to clients.

He flagged the commentary from President Ruth Porat about the potential for higher depreciation costs and headcount in the third quarter. The "pulling forward" of hardware launches into the current quarter could also be a headwind to margins.

"Given the recent capex surges at Alphabet and leading clouds, depreciation commentary could be worth watching on the EPS and gross-margin lines for many of the Magnificent 7 including Microsoft, Amazon and Meta," Reitzes wrote.

In addition, Google showed interest in acquiring two companies, HubSpot and Wiz,in the recent months, either of which would have been the biggest-ever purchase for the internet giant — but both times, the deals fell apart.

“We are always looking for good opportunities to diversify the portfolio and will continue to do so if we find the right combination of factors, including value,” Porat said, without commenting on the Wiz talks. “Regulatory scrutiny is not new for us, and we have successfully managed regulatory reviews of many large deals in the past.”

Source: Yahoo Finance, Investing, Bloomberg