Alphabet’s Ad Revenue Disappoints, CapEx Rises; Shares Drop 6% – Reuters

By Jeffrey Dastin and Akash Sriram

Alphabet’s latest financial report fell short of Wall Street expectations, as holiday-season advertising revenues came in lower than anticipated. The company also indicated a significant increase in spending on essential resources, including servers for artificial intelligence initiatives, for the coming year.

In after-hours trading, Alphabet’s shares dropped by 6%.

Amid mixed economic signals in the U.S., Alphabet’s prominent divisions, Google and YouTube, are encountering stiff competition for advertising dollars from various online platforms like Facebook, Instagram, TikTok, and Amazon.

Still, the company noted an increase in fourth-quarter advertising revenue to $65.5 billion, up from $59.0 billion a year earlier. However, this figure fell short of analysts’ average estimate of $66.02 billion.

Analyst Thomas Monteiro remarked that Alphabet’s disappointing advertising figures reflect ongoing uncertainty among corporations regarding the timing of interest rate cuts from central banks globally.

Google, a pioneer in foundational AI technology, is engaged in intense competition with notable players in the industry, including OpenAI, the developer of ChatGPT, and its partner Microsoft.

Although Google Cloud’s revenue exceeded expectations and showed growth driven by AI, Microsoft’s Azure platform reported even faster growth during the same timeframe.

Investments in AI necessitate substantial spending on servers, data centers, and research. Alphabet’s capital expenditures surged by 45% to $11 billion, marking the highest level in years. CFO Ruth Porat informed analysts during a conference call that capital expenditures would be significantly higher this year compared to 2023.

To manage costs, many technology firms, including Alphabet, are reducing non-essential projects and cutting jobs. Porat indicated that the company anticipates $700 million in severance-related expenses in the upcoming quarter.

In a strategic move, Google is introducing a robust suite of AI models, known as Gemini, to enhance its ChatGPT competitor, Bard. The company has also made a commitment to invest up to $2 billion in the AI startup Anthropic to attract clients from larger cloud competitors like Microsoft and Amazon, while ensuring Gemini is accessible to advertisers to maintain their investment in Google’s search services.

However, it remains uncertain whether the potential advertising benefits from AI will materialize quickly, given the current geopolitical and economic instabilities that may deter ad buyers. The U.S. has begun scrutinizing AI investments, including those made by Alphabet, as Google prepares to appeal a significant antitrust case it lost.

Alphabet reported a fourth-quarter profit of $20.7 billion.

In a conversation with analysts, CEO Sundar Pichai highlighted the advancements in AI across Alphabet’s businesses, noting that it opens up new opportunities for Google to answer complex queries effectively.

Since the launch of ChatGPT by OpenAI in November 2022, there has been increased interest in generative AI’s ability to create text and images from simple prompts. This development has also fueled speculation about AI "agents" that can autonomously handle tasks for users.

When asked about Google Assistant, Pichai stated that AI technology allows it to "act more like an agent over time," aiming to provide more comprehensive assistance beyond just answers.

As Alphabet concentrates on AI, investor interest in Google Cloud has risen sharply. Last year marked the division’s first quarterly profit, although revenue growth slowed as clients optimized their cloud expenditures.

Microsoft remains a strong competitor, having integrated AI features into its cloud and productivity platforms widely used by businesses, while Google is promoting its own competitive tools.

Pichai mentioned that generative AI is contributing to cloud revenue growth, reporting $9.2 billion for Google Cloud in the most recent quarter, surpassing expectations of $8.9 billion. This reflects a 25.7% growth in cloud revenue from the previous quarter, though it is slower compared to the 32% growth witnessed in the same period a year prior.

Meanwhile, Microsoft announced a 30% growth in sales of its Azure cloud platform.

For the quarter ending December 31, Alphabet’s total revenue stood at $86.3 billion, surpassing estimates of $85.3 billion.