Alphabet’s cloud momentum waned in the third quarter, causing shares of the Google parent company to dip more than 5% in after-hours trading on Oct. 24.
Google Cloud revenue was up 22.5% compared with last year’s third quarter, to $8.41 billion. But that missed Wall Street revenue estimates of $8.6 billion and marked the division’s slowest growth since the first quarter of 2021.
While cloud growth is “strong across geographies, industries, and products,” Alphabet CFO Ruth Porat said during an earnings call, the below-forecast expansion rate “reflects the impact of customer optimization efforts,” a signal that customers are pulling back on their spending.
This is a far cry from a more optimistic tone by Alphabet CEO Sundar Pichai last quarter, when he boasted “more than 70% of gen AI unicorns are Google Cloud customers” and that the company’s “AI-optimized infrastructure is a leading platform for training and serving generative AI models.”
Google has been trying to play catch-up in the generative AI space ever since Microsoft’s surprise investment in OpenAI firmly placed it in the number one spot in the AI race. Based on Microsoft’s 29% increase in cloud revenue in the recent quarter, it appears to be putting more distance between itself and its rival.
Awaiting “exciting progress”
As Rohit Kulkarni, Roth MKM’s managing director, told Yahoo Finance, Google is the “godfather of AI” but “they’re still in search of that killer AI app.”
Alphabet’s effort to integrate AI into products ranging from its search engine to its Workspace tools still may be in its infancy, however.
“We’re continuing to focus on making AI more helpful for everyone; there’s exciting progress and lots more to come,” said Pichai in a statement.
Alphabet’s performance for the third quarter, by the digits:
$76.69 billion: Total revenue beat estimates of $75.96 billion
$1.55: Adjusted earnings per share beat estimates of $1.44
$19.69 billion: Net income beat estimates of $18.52 billion
$59.7 billion: Google’s advertising business beat revenue estimates of $58.9 billion—a 9% increase from a year before.
$8.41 billion: Google’s cloud business sales fell short of the estimated $8.6 billion
$44 billion: Google search ad revenue
$7.95 billion: YouTube’s ad revenue beat estimates of $7.81 billion