Last Tuesday, Alphabet Inc. released its second-quarter financial report, kicking off the earnings season for big tech companies. Sales and profits beat Wall Street expectations thanks to strong search advertising and continued growth in the cloud, but YouTube advertising revenue fell short of expectations due to tough competition for ad dollars. Shares fell on concerns that increased investment in AI infrastructure will continue to squeeze profit margins.
Second Quarter Highlights
Revenue rose 14% year-over-year to $84.74 billion, beating LSEG’s consensus estimate of $84.19 billion, as quarterly revenue surpassed $10 billion for the first time and operating profit exceeded $1 billion for the first time, driven by search and cloud.
YouTube ads brought in $8.66 billion, but this was less than StreetAccount’s $8.93 billion.
Meanwhile, Google Cloud revenue came in at $10.35 billion, beating StreetAccount expectations of $10.2 billion.
The advertising business continued to grow, albeit at a slower pace than the first quarter, with revenue reaching $64.62 billion, up from $58.14 billion in the same period last year.
The “other businesses” segment, which includes self-driving car maker Waymo, made a profit of $365 million, up from $285 million a year earlier.
Traffic acquisition costs were $13.39 billion, down from $13.54 billion from street accounts, and net income increased to $23.6 billion, or $1.89 per share, from $18.4 billion, or $1.44 per share, in the same period last year.
AI remains murky
Alphabet continues to spend billions of dollars building out its AI capabilities, with much of its capital expenditures going toward servers and data centers, but CEO Sundar Pichai declined to answer questions about when such spending would translate into actual revenue. Pichai added that when it comes to long-term bets like this, it’s better to overinvest than risk falling behind. Alphabet’s latest report did not disclose how much Google’s AI investments are contributing to the company’s bottom line.
Meanwhile, Microsoft Corp. (MSFT-backed OpenAI) unveiled its own search engine on Thursday, an AI-powered search engine that Microsoft has pledged to increase pressure on Google. OpenAI promises to give consumers new ways to find information online, and with OpenAI’s help, Microsoft could challenge Google’s dominance in search. Alphabet shares fell more than 3% on the news of Microsoft-backed OpenAI.
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