Alphabet entered its earnings report Thursday amid concerns about the growth of its core Google advertising business and the company’s ability to generate profits from its heavy investments in artificial intelligence.
For now at least, the company has allayed Wall Street’s fears.
Alphabet beat analyst estimates, reporting 15% revenue growth for the quarter, the fastest rate of expansion since early 2022. YouTube ad sales jumped 20%, also beating expectations.
Questions swirl around the future of Google’s online ads as the main revenue driver remains search, which is under pressure as new generative AI services like OpenAI’s ChatGPT offer consumers new ways to ‘access information.
“We’re very pleased with the strength of our advertising business,” Ruth Porat, Alphabet’s chief financial officer, said on the earnings conference call after the report was released. “Research has seen widespread growth.”
Alphabet shares jumped 12% in extended trading, pushing the company’s market capitalization past $2 trillion. Prior to the report’s release, the stock was up 12% for the year, ahead of the Nasdaq Composite but behind some large-cap peers like Meta, Nvidia And Amazon.
First-quarter results showed that the core advertising business is reaccelerating after a difficult 2022 and 2023, when brands cut spending to cope with rising interest rates and inflation concerns. Growth is spread across the digital advertising market, with Meta reporting 27% growth for the first quarter, the fastest since 2021, and Instant showing growth of 21%, a level not seen since the start of 2022.
Alphabet has embarked on a cost-cutting campaign since last year in anticipation of slowing advertising growth and increased spending on AI, where competition has rapidly grown. last year. The company has also experienced a series of apparent missteps related to the rushed launch of various AI products.
There were other reasons for skepticism before Alphabet’s earnings release.
Investors turned against Meta after its first-quarter report Wednesday, sending the stock down as much as 19% in extended trading. CEO Mark Zuckerberg opened the investor call by saying he plans to spend billions of dollars investing in areas like artificial intelligence and the metaverse, even though Meta relies on advertising for 98% of its income.
Like Meta, Alphabet is investing money in AI. But his investments turn into sales.
Revenue at Google Cloud, which hosts much of the company’s AI technology, jumped 28% from a year earlier to $9.57 billion, beating estimates. Operating profit more than quadrupled to $900 million, showing that Google is finally generating substantial profits after pouring money into the company for years to keep pace with Amazon Web Services and Microsoft Azure.
Last month, Alphabet announced a suite of products, including Vertex AI, a no-code console for companies to create their own AI agents.
“There were a lot of questions last year and, you know, we always had confidence that we would be able to improve the user experience,” CEO Sundar Pichai said during the earnings conference call on Thursday.
Pichai said he has seen “first confirmation” that the company can use AI to expand search capabilities, citing deployments in the United States and the United Kingdom. He said the company can both manage expenses and monetize AI tools at the same time in the coming quarters.
To show how confident the company is in its financial position, Alphabet announced its first-ever quarterly dividend of 20 cents per share and a plan to repurchase additional shares worth $70 billion.
With Q1 results in the rearview mirror, Alphabet now faces heightened expectations, which will only increase as competitors roll out more generative AI products. The company also has just a few more quarters in which growth will be comparable to some of its weakest results on record.
“We are facing a new cost reality,” Prabhakar Raghavan, a senior vice president overseeing research, said at a recent all-hands meeting, urging employees to work more efficiently.
With generative AI, the company is “spending a lot more on machines,” Raghavan added, saying organic growth is slowing and the number of new devices coming into the world “isn’t what it used to be.”
cnbc
