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Google-parent Alphabet’s cloud division missed estimates for third-quarter revenue on Tuesday (Oct 24) as an uncertain economy and high interest rates forced companies to trim their budgets.
Shares of the Mountain View, California-based company fell roughly 5 per cent in extended trading.
The drop in Google’s share price despite beating Wall Street estimates for profit and sales, shows how much investors want the company to deliver gains in AI, and show the cloud business remains competitive against a more powerful Azure from Microsoft and Amazon.com’s AWS.
Fears of a slowing global economy have prompted companies to curb spending on cloud-related services, including expensive AI tools, which has slowed revenue growth at Google’s cloud unit to 22.5 per cent in the third quarter, from 28 per cent in the prior three-month period.
Google Cloud third-quarter revenue rose 22.5 per cent to US$8.41 billion, the slowest growth since at least the first quarter of 2021. The cloud unit reported a operating income of US$266 million, compared with an operating loss of US$440 million a year ago. Wall Street expected cloud computing revenue of US$8.62 billion.
By contrast, revenue from Microsoft’s Intelligent Cloud unit, which houses the Azure cloud computing platform, grew to US$24.3 billion, compared with analysts’ estimate of US$23.49 billion, LSEG data showed. Azure revenue rose 29 per cent, higher than a 26.2 per cent growth estimate from market research firm Visible Alpha. Microsoft shares rose 5 per cent after hours.
“Despite Alphabet topping quarterly earnings and revenue estimates, investors were disappointed by the relatively weak performance at its Google cloud platform, which is at risk of falling further behind Azure and AWS,” Investing.com senior analyst Jesse Cohen.
While advertising spending has been strong in some sectors such as retail and travel, industry executives and analysts have noted a pullback in budgets in some areas, affecting Alphabet’s major source of revenue.
The company recorded ad revenue of US$59.65 billion in the third quarter, compared with US$54.48 billion a year earlier. Analysts on average had expected US$59.12 billion in revenue from its advertising business. Within the company’s advertising segment, YouTube ads reported revenue of US$7.95 billion compared with US$7.07 billion last year.
Alphabet reported a net profit of US$19.69 billion for the July-Sept. period, compared with US$13.91 billion a year earlier.
Revenue for the quarter ended Sep 30 stood at US$76.69 billion, compared with estimates of US$75.97 billion, according to LSEG data.
Alphabet laid off roughly than 12,000 employees earlier this year, or about 6 per cent of its global workforce, in an effort to cut staff amid a “different economic reality”. The company also laid off employees from its global recruiting team in September.
The company disclosed that it recorded severance and related charges of US$2.1 billion for the first nine months of the year.
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