Mixed Bag for Alphabet: Cloud Wins, AI Monetisation a Mystery
Google parent company Alphabet (GOOG, GOOGL) defied analyst expectations in its second-quarter earnings report, exceeding targets on both revenue and earnings per share (EPS). The strong performance was driven by a rebound in advertising revenue and continued growth in its cloud computing segment, Google Cloud, which achieved its first-ever operating profit of over $1 billion.
Solid Earnings Beat
Alphabet reported EPS of $1.89 on revenue of $84.7 billion, surpassing analyst estimates of $1.85 and $84.3 billion, respectively. This represents a significant jump of 31% and 14% year-over-year compared to Q2 2023’s figures of $1.44 EPS and $74.6 billion in revenue.
Advertising revenue, Alphabet’s core business, reached $64.6 billion, exceeding expectations of $64.5 billion and marking an improvement from $58.1 billion last year. However, YouTube ad revenue fell short of predictions, generating $8.66 billion against analysts’ estimates of $8.95 billion.
Cloud Shines Bright
Google Cloud emerged as a bright spot for Alphabet. The segment reported impressive results, exceeding analyst expectations with $10.35 billion in revenue and $1.17 billion in operating income. This surpasses analyst predictions of $10.1 billion and $982.2 million, respectively, and significantly improves upon Q2 2023’s figures of $8 billion in revenue and $395 million in operating income.
The earnings report underscores Alphabet’s continued focus on building its generative AI capabilities. The company invested a hefty $2.2 billion in AI model development across DeepMind and Google Research in Q2, compared to $1.1 billion in the same period last year. This reflects an industry-wide trend as tech giants like Alphabet, Microsoft (MSFT), and Amazon (AMZN) (whose shares are also up significantly year-to-date) compete fiercely in the AI space.
AI Monetisation: A Question Mark
Despite the significant investments, the exact timeline for AI to generate meaningful revenue for Alphabet remains unclear. Analysts like Brent Thill of Jefferies believe that substantial AI revenue is unlikely to materialise before 2025-2026, as most companies are still experimenting with the technology.
Alphabet’s efforts with AI haven’t been without hiccups. The company’s much-anticipated AI Overview feature, launched in May 2024, faced criticism for inaccurate responses, including suggestions to put glue on pizza or eat rocks daily. Google responded by scaling back some of the feature’s functionalities.
While Alphabet is bullish on AI, the company is also implementing cost-cutting measures in other areas. The company’s headcount has decreased from 181,798 in Q2 2023 to 179,582 in Q2 2024.
