Alphabet shares take a hit as revenue from Google Search misses estimates, spends exorbitantly high on AI

Alphabet has reported its earnings and revenue for the quarter ending on December 2023 following which its shares took a hit. Although Alphabet’s revenue from its core business, Google Search did not meet expectations, revenues from other sources were up.

However, the costs that Alphabet has incurred in developing and deploying its AI solutions in a bid to take on Microsoft and OpenAI has shaken investor confidence.

In the three months ending on December 31, revenue from sales, surged by 15 per cent to $72.3 billion, excluding partner payouts. This surpassed the projected $71 billion, marking the best quarter for revenue growth in seven. Net income amounted to $1.64 per share, exceeding Wall Street’s estimate of $1.59 per share.

However, revenue in Alphabet’s core search business reached $48 billion, narrowly missing analysts’ predictions of $48.15 billion. Consequently, the company’s shares experienced a 6.5 per cent decline in extended trading.

These disappointing results coincide with a period of broader uncertainty for Google’s dominant search engine, facing potential threats to its leading position in the global internet landscape. The rise of generative AI, enabling competitors like Microsoft Corp. and OpenAI to deliver more conversational question-answering programs, poses a challenge to Google’s traditional dominance.

Despite the robust performance, concerns are mounting as Google advertising constitutes the majority of Alphabet’s revenue. The company’s increased focus on AI and its ambitious plans raise concerns about the stability of this cash cow.

While Wall Street had high expectations for Alphabet’s endeavours in AI, pushing its stock up nearly 60 per cent over the past 12 months, investors are now seeking clarity on when the technology will significantly impact earnings and revenue.

As Alphabet invests in AI and other priorities, including substantial resources allocated by CEO Sundar Pichai, the company has undergone operational scrutiny, leading to layoffs in various areas. Pichai has hinted at potential further layoffs in the coming year.

In the fourth quarter, Google’s cloud unit, closely monitored for its performance, reported an operating profit of $864 million, more than doubling analysts’ expectations. However, Google Cloud still trails behind competitors like Microsoft and Amazon in the cloud computing market.

Alphabet’s push into AI has come with increased costs, reflected in a rise in capital expenditures, attributed directly to AI investment. Capital spending is expected to be significantly larger in the current year compared to 2023.

Despite efforts to diversify beyond its flagship product, Google, Alphabet’s Other Bets unit, which includes ventures like Waymo and Verily, reported $657 million in revenue while operating at a loss of $863 million. This loss was less than the projected $1.3 billion.

YouTube, another major business under Alphabet, reported $9.2 billion in revenue, slightly exceeding analysts’ estimates. Meanwhile, the Google Network business, responsible for serving ads on other parts of the internet, experienced a 2 per cent revenue decline to $8.3 billion, setting the stage for an upcoming antitrust trial later this year.

(With inputs from agencies)