Google Cloud on smartphone
Sharp acceleration in Google Cloud’s third-quarter growth rate / Image source: Adobe
  • Stock hits three-month high $181
  • Cloud and YouTube shine
  • AI a battlefield for Alphabet

Out of the mega tech blocks first - excluding Tesla (TSLA:NASDAQ)Alphabet (GOOG:NASDAQ) calmed nerves on Wall Street after-hours Tuesday (29 Oct) with a sharp acceleration in Google Cloud’s third-quarter growth rate, while election spending also boosted advertisement sales, especially on YouTube. 

Going from the second quarter’s 29% to 35% was no mean feat with the firm’s chief executive Sundar Pichai handing much of the credit to the company’s AI (artificial intelligence) portfolio, which he said was helping it win new customers as well as lift usage by existing customers.

Expectations for tech stocks are high this earnings season

Pichai stopped short of putting hard and fast numbers on AI’s impact, something that investors might want to change down the line, but for now, all seems well in the Google Cloud. The unit helped shove Alphabet’s overall top-line growth rate to 15%, higher than the 12.5% analysts were projecting.

STOCK HITS THREE-MONTH HIGH

That underwrote a near-6% lift in Alphabet’s somewhat soggy share price of late, pushing the shares to their highest since July, with pre-market data pointing towards an open at $181.22 when Wall Street trading kicks off later today.

Google Cloud site‘AI really supercharges search’, said Google’s business chief / Image source: Adobe

So, what could go wrong? A couple of things need watching. The future of Alphabet’s search business remains the market’s chief worry. Search ad growth slowed to 12% from 14% in the second quarter, and while plenty of analysts will write this off as more of a return to the business’s long-term growth rate after getting a huge spending kicker from Asian shopping sites like Temu and Shein last year, the bigger worry is that AI chatbots could pull consumers away from search.

There’s precious little evidence of that happening now, yet the fact that Alphabet executives are so keen to show how ‘on top of the issue’ they are – flagging ‘circle to search’, which lets people search for a product by circling an image of it in a photograph - suggests it is seen as a very real threat by the firm’s top brass.

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‘AI really supercharges search’, said Google’s business chief, Philipp Schindler, a comment the US government is sure to cite, as it mulls ways to dampen Alphabet’s search dominance.

AI CARRIES A LARGE COST

The other big factor is how much it will cost Alphabet to defend its patch. Amid talk of more operational cost cuts from the company’s new chief financial officer, Anat Ashkenazi, there was an acceptance that capital expenditures will increase further in 2025, after a big boost this year caused by spending on new servers and related equipment to handle work on AI services.

The past two quarters have shown capex is now running at a quarterly rate of about $13 billion, compared to between $6 billion and $8 billion for most of last year, and Ashkenazi said it would run at the same $13 billion rate in the fourth quarter.

Plenty for investors to think about.

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Issue Date: 30 Oct 2024