Alphabet Has Strong Ad Sales but Cloud Business Disappoints

A rebound in digital advertising led to an uptick in revenue and profit for Alphabet, Google’s parent company, but investors were underwhelmed by its cloud computing business, which badly trails those of rivals Microsoft and Amazon.

Alphabet reported $76.7 billion in quarterly sales on Tuesday, up 11 percent from a year earlier, and roughly in line with analysts’ estimate of $76 billion, according to data compiled by FactSet.

The internet giant said that its profit jumped 42 percent to $19.7 billion, exceeding Wall Street expectations of $18.5 billion.

“Investors were disappointed by the relatively weak performance at its Google Cloud Platform, which is at risk of falling further behind” Microsoft Azure and Amazon Web Services, Jesse Cohen, an analyst at investing.com, wrote in a note.

Alphabet’s share price was down more than 6 percent in after-hours trading on Tuesday evening.

Google has focused on generative artificial intelligence, the technology that caused a splash when OpenAI released the A.I. chatbot ChatGPT last November. Google said in July that it would pour more resources into developing that technology while cutting other spending. In the last month, Google has shed hundreds of its recruiters and reorganized other parts of the company.

As of Sept. 30, the company had 182,381 employees, compared with about 119,000 at the end of 2019. Like other tech companies, Alphabet binged on hiring during the pandemic, and began to unwind those habits in January, when it cut 6 percent of its work force, or 12,000 employees.

Investors had expected that Alphabet would cut more costs in the third quarter. The company’s operating income, a measure of profitability, was a bit lower than the $21.6 billion that analysts had anticipated.

Google Cloud, the company’s division that offers software and technology services to other businesses, recorded sales that increased 22 percent to $8.4 billion. Analysts, though, had estimated $8.6 billion. Google has invested in making its cloud division a destination for artificial intelligence software, and the quarter’s performance disappointed investors who had hoped A.I. could be a launching pad for the unit. The division posted a profit of $266 million in the third quarter.

Sundar Pichai, Alphabet’s chief executive, said on a conference call on Tuesday that Google Cloud had momentum, and that he had seen signs that the unit’s performance would become more stable. Ruth Porat, the company’s president, chief investment officer and chief financial officer, told analysts on the call that the company’s cloud customers have been more careful with their spending.

Google’s quarterly performance contrasted with results also announced on Tuesday by Microsoft, which far outpaced expectations because of greater demand for its cloud technology.

Revenue from Google’s search engine and related services, its largest business, rose 11 percent to $44 billion in the second quarter, narrowly topping analysts’ estimate of $43.3 billion.

Advertising sales at YouTube, Google’s video platform, climbed 12 percent to $7.95 billion, just ahead of the $7.8 billion expected by analysts.

“It is a testament to the nature of Google’s market dominance in search and ads that it can beat” profit and revenue estimates and have its stock sag, Max Willens, an analyst at Insider Intelligence, said in a statement. “Cloud computing is a much lumpier business than advertising.”