Alphabet (GOOG, GOOGL) shares fell more than 4% on Wednesday as investors continued to focus on the company’s growing AI spending while disappointing YouTube ad revenue also caused investors some headaches after the Google parent company reported its most recent quarterly earnings.
Dan Howley of Yahoo Finance reports:
Google parent Alphabet (GOOG, GOOGL) reported second-quarter earnings after the close of trading on Tuesday, with its cloud business continuing to perform well and the company beating analysts’ expectations in both revenue and profit, with operating profit surpassing the $1 billion mark for the first time.
The company posted fourth-quarter earnings of $1.89 a share on sales of $84.7 billion. Analysts had expected earnings of $1.85 a share on sales of $84.3 billion, according to data compiled by Bloomberg. That’s up 31 percent and 14 percent, respectively, from the same period last year, when the company reported earnings of $1.44 a share on sales of $74.6 billion.
Ad revenue topped $64.6 billion, beating analysts’ expectations of $64.5 billion, and up from $58.1 billion last year. YouTube ad revenue, however, fell short of expectations, with the division earning $8.66 billion compared with the $8.95 billion forecast.
Google’s cloud revenue was $10.35 billion and operating profit was $1.17 billion, beating analysts’ expectations of $10.1 billion and $982.2 million in operating profit, and above the $8 billion in revenue and $395 million in operating profit that the company reported for Q2 2023.
Alphabet shares are up 30% so far this year. Rivals Microsoft (MSFT) and Amazon (AMZN) are up 18% and 22%, respectively, so far this year. All three companies are pouring money into building out generative AI capabilities, investing heavily in data centers that can run the AI models they make available through their cloud-services platforms.
In the second quarter, Alphabet reported spending $2.2 billion on building AI models across its DeepMind and Google Research organizations, up from $1.1 billion in the second quarter of 2023. It remains unclear when AI will start generating revenue for Google’s cloud business, much less its advertising segment.
“It’s still too early to expect any benefits from AI. [companies] Still in pilot mode, material AI [revenue] “This is likely to occur in 2025-26,” Jefferies analyst Brent Till wrote in a recent client note ahead of Alphabet’s earnings release.