Market Analysis

Alphabet's AI efforts strengthen its aging ad business and increase cloud sales

Amos Simanungkalit · 30 Oct 202419.9K Views

On Tuesday, Alphabet Inc. (NASDAQ: GOOGL), the parent company of Google, announced that its investments in artificial intelligence are yielding positive results, reporting a remarkable 35% increase in its cloud business and a rise in YouTube ad sales driven by U.S. election-related spending in the third quarter. Following this announcement, Alphabet's shares climbed nearly 6% in after-hours trading, while shares of leading cloud competitors Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) also saw a slight increase of about 1%.

The company surpassed both revenue and earnings expectations for the third quarter, with its core Search business and YouTube ad revenue each growing by 12%. Matt Britzman, a senior equity analyst at Hargreaves Lansdown, remarked, “Alphabet is the first major tech firm to report earnings, and it hasn't disappointed. Cloud growth was strong, supporting the view that major cloud providers are well-positioned to capitalize on the AI revolution.”

Despite being perceived as lagging behind its competitor Microsoft in the AI race, Google has been actively enhancing its Gemini AI chatbot and improving its AI-powered search capabilities. The company's commitment to AI remains strong, with new Chief Financial Officer Anat Ashkenazi indicating that capital expenditures for 2025 would surpass those of this year. In the third quarter, Alphabet’s capital expenditures rose by 62% to $13 billion, with similar expectations for the fourth quarter.

Some analysts noted that Alphabet's impressive performance came against a backdrop of low expectations, suggesting that its expanding cloud business might gradually compensate for a slowdown in advertising revenue. Google's long-standing dominance in the digital advertising market faces challenges from Amazon and TikTok, which have attracted advertisers seeking a ready audience. Additionally, the Search business is under regulatory scrutiny aimed at potentially breaking up the company.

Notably, the cloud segment experienced its most significant growth in eight quarters, reaching $11.35 billion, driven by increased enterprise investment in cloud solutions essential for powering AI technologies. Analysts had estimated the revenue to be around $10.86 billion. Bob O'Donnell, president of TECHnalysis Research, emphasized, "Google Cloud's ability to more than offset the decline in Search highlights the growing importance of cloud revenues and the company's ongoing efforts to diversify its revenue sources."

Google has introduced ads in AI Overviews, which utilize generative AI to summarize information from various sources, providing concise search results. Analysts have noted that users find these new AI tools more effective than earlier iterations, marking a significant improvement from earlier this year when the feature faced criticism for providing inaccurate answers.

In terms of earnings, Alphabet reported a profit of $2.12 per share, exceeding the average market estimate of $1.85, according to LSEG data. Google's chief business officer, Philipp Schindler, mentioned that there was a slight boost from election-related ad spending, particularly in YouTube ads.

In contrast, Snap, a social media platform reliant on advertising, also reported strong quarterly revenue and user growth, leading to a 6% increase in its stock price after hours. Alphabet's digital advertising revenue, the largest component of its total earnings, rose by 10% to $65.85 billion in the third quarter; however, this growth rate has decelerated compared to the second quarter.

Angelo Zino, a senior equity analyst at CFRA Research, predicts, “I fully expect Google to start losing market share in advertising over the next two to three years. As we shift towards an AI-driven marketplace, competitive pressures are likely to increase.” According to eMarketer data, Google's share of U.S. search advertising revenue is expected to dip below 50% next year for the first time in nearly two decades, while Amazon's share is projected to rise from 22% to 24% this year.

Overall, Alphabet’s total revenue for the July-September period grew by 15% to $88.27 billion, surpassing analysts' expectations of $86.30 billion, aided in part by the early launch of its smartphones this year.