Alphabet Sales Beat Estimates On Google Cloud Unit Growth

Alphabet Inc. sales topped quarterly Wall Street estimates, fueled by a surge in demand for its cloud and artificial intelligence services. Shares rose as much as 7.5% in extended trading.

Third-quarter sales, excluding partner payouts, rose to $87.5 billion, Alphabet said in a statement Wednesday. That topped the $85.1 billion expected on average by analysts, according to data compiled by Bloomberg. Net income was $2.87 per share, compared with Wall Street’s estimate of $2.26.

The company is investing record amounts to try to push progress in AI, and infuse answers and assistance from its large language model, Gemini, into its popular products including search. The company said capital expenditures for the year will be $91 billion to $93 billion, up from the $85 billion earlier estimate. 

Competitors Meta Platforms Inc. and Microsoft Corp., which also reported on Wednesday, made similar promises to spend more, and their shares fell in extended trading. But Alphabet was able to prove to investors that its spending is fueling growth across Google’s businesses, particularly in cloud computing and search advertising.

“We are seeing AI now driving real business results across the company,” Alphabet Chief Executive Officer Sundar Pichai said on a call with analysts. “Our momentum is strong.” He added that revenue from products built on Google’s generative AI models grew more than 200% from a year earlier, a sign that the company’s years of investment in infrastructure and research are beginning to pay off. The company is also seeing growth selling AI tools to its cloud customers.

Alphabet views its AI spending — from data centers and custom chips to research and talent — as critical for competing against big cloud-computing rivals like Amazon.com Inc. and Microsoft. Chief Financial Officer Anat Ashkenazi said about 60% of the company’s capital expenditures last quarter went to servers, with the rest directed to data centers and networking equipment that support its expanding AI operations.

The company’s shares gained 2.7% to close at $274.57 in regular trading Wednesday. The stock has gained 45% so far this year.

Alphabet’s cloud unit has scored major deals with AI startups, including a high-profile, multibillion-dollar agreement to supply Anthropic with specialized AI chips. The unit lags Amazon’s AWS and Microsoft’s Azure in size, and so is expected to grow more quickly. The cloud unit’s sales grew 33.5% year-over-year to $15.2 billion, compared with the estimate for $14.8 billion.

Google Cloud generated a profit of $3.59 billion, beating analysts’ estimates for an operating income of $3 billion. The unit is widely viewed as Alphabet’s strongest source of growth and the clearest indicator of how the AI boom is contributing to the company’s sales. The company said it has $155 billion in contracts it has yet to fulfill. 

Google kept up its profitability, with a cloud backlog that gave investors “strong visibility into future performance,” said Angelo Zino, an analyst with CFRA Research. Overall, the quarter “demonstrates effective use of spending,” he said.

Search advertising brought in $56.6 billion in sales, compared with the $55 billion average analyst projection. The unit is the powerhouse driving Google’s broader advertising business and has so far weathered the growing competition from AI chatbots, but Google must ensure that search remains profitable. The centerpiece of its offensive is the company’s flagship AI model Gemini, which Google has rapidly integrated into search and other key products. Earlier this year, the tech giant avoided the worst result in a major federal search antitrust lawsuit, because the judge in the case concluded that its business was already under a growing threat from AI.

Google is under pressure to show it can successfully make money off of ads in AI answers as competitors, notably OpenAI, launch services like AI-powered search tools and web browsers. Google’s “search instance share losses to ChatGPT have moderated” in the third quarter, according to a note from Daniel Morgan, senior portfolio manager at Synovus Trust. OpenAI’s recent restructuring plan, which will help the firm become a for-profit business, could also pave the way for that company to put ads in ChatGPT, further competing with Google, according to BNP Paribas equity analyst Stefan Slowinski.

The video streaming site YouTube, which turned 20 this year, reported $10.3 billion in revenue — beating analysts’ $10 billion estimate. The division has invested heavily in podcasting and recently announced that users are now watching video podcasts for 100 million hours each day. 

Alphabet’s Other Bets, a group of futuristic ventures including the life sciences unit Verily and the self-driving car company Waymo, reported $344 million in revenue while losing $1.43 billion. That compared with analysts’ projections for a loss of $1.2 billion. Alphabet is aggressively expanding Waymo, while pushing its other ventures to spin off as independent startups rather than integrate as units of their parent company, Bloomberg has reported. The car company is aiming to expand to London and Tokyo, and is currently testing autonomous driving in New York City, Pichai said.

(Updates with CEO commentary in the fifth paragraph.)