Alphabet's AI investments boost cloud sales, lifts maturing ad business

By Deborah Mary Sophia and Kenrick Cai

(Reuters) - Google parent Alphabet (NASDAQ:GOOGL ) said on Tuesday its AI investments were "paying off" as it reported a 35% surge in its cloud business and U.S. election-related spending lifted YouTube ad sales in the third quarter.

Alphabet shares rose nearly 6% in after-market trading on Tuesday. Shares of Amazon (NASDAQ:AMZN ) and Microsoft (NASDAQ:MSFT ), the top cloud companies, were up about 1% after hours.

Alphabet topped third-quarter revenue and earnings expectations. Its mainstay Search business jumped 12% and as did revenue from YouTube ads.

"Alphabet is the first major tech name to report earnings, and it hasn't disappointed," said Matt Britzman, senior equity analyst at Hargreaves Lansdown. "Cloud growth was strong ... which continues to support the argument that the major cloud providers are well-placed to benefit from the AI revolution."

Perceived as slow to catch up with Big Tech rival Microsoft in the AI race, Google has been beefing up its Gemini AI chatbot and improving its AI-powered Search. 

The company is continuing to spend big on AI.

Its new chief financial officer, Anat Ashkenazi, fielding her first analyst call, said Alphabet's capital expenditures in 2025 would be higher than this year.

In the third quarter, Alphabet's capex rose 62% to $13 billion. The fourth quarter is expected to be similar, she said.

Some analysts said Alphabet's quarter looked impressive compared with low expectations, and that its small but growing cloud business could slowly fill in for its slowing ad business.

Google's long-established dominance of the digital ad market is under threat from Amazon and TikTok, which have become popular with advertisers looking to tap a ready pool of buyers. Its Search business is also facing scrutiny from regulators seeking to break up the company.

But its cloud business grew at the fastest pace in eight quarters - to $11.35 billion - thanks to enterprises doubling down on cloud spending, which is essential to power artificial-intelligence technologies. Analysts estimated $10.86 billion.

"I do think it was an impressive quarter because the fact that Google Cloud could more than offset Search decline speaks both to the growing importance of cloud revenues and the fact that the company continues to diversify its revenue base," said Bob O'Donnell, president of TECHnalysis Research.

Google has rolled out ads in AI Overviews, which use generative AI to summarize content from a range of sources and display concise results for search queries. 

Analysts said users think the company's new AI tools are more effective than previously - a significant improvement from earlier this year when the feature drew harsh criticism for displaying inaccurate answers, including a pizza recipe that listed glue as an ingredient.

Alphabet also beat profit expectations with earnings of $2.12 per share, compared with an average market estimate of $1.85, according to LSEG.

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"We had a slight tailwind from election-related ad spend in the third quarter, which was a little bit more pronounced in YouTube ads," Google's chief business officer, Philipp Schindler, said on a post-earnings call.

Social media company Snap, which also depends on advertising, posted good news for shareholders, topping Wall Street targets for quarterly revenue and user growth, sending shares up 6% in after-hours trading.

Alphabet's digital advertising sales - the biggest chunk of its total revenue - rose 10% to $65.85 billion in the third quarter. But that pace of growth slowed from the second quarter.

"I completely expect Google to start losing share in the ad market over the next two to three years," said Angelo Zino, senior equity analyst at CFRA Research. "Clearly, as we kind of move towards more of an AI-driven market, there's going to be increasing competitive pressures out there as a result."



According to data from eMarketer, Google's share of U.S. search advertising revenue is projected to fall below 50% next year, for the first time in at least 18 years. Meanwhile, Amazon's share is expected to grow to 24% from 22% this year.

Alphabet's total revenue increased 15% to $88.27 billion in the July-September period, while analysts on average expected $86.30 billion, according to LSEG data. Pulling forward the company's smartphone launch this year helped boost revenue.

Source: Investing.com