(Bloomberg) — Alphabet Inc.’s cloud computing unit reported lower-than-expected profit, raising concerns about the company’s position in a market crucial to its future. Shares of Alphabet fell 6.5% in premarket trading on Wednesday.
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As Google’s dominant search business matures, investors expect the cloud unit to take growth leadership. The unit reported operating income of $266 million, missing estimates of $434 million.
In the cloud computing market, where companies sell space on their servers and software to enterprise customers, Google has long trailed Amazon.com Inc. and Microsoft Corp. Google Cloud, which reported a profit for the first time earlier this year, is attracting artificial intelligence companies. But the company’s momentum fell short of expectations in the latest quarter, prompting some fears that the gap between Google and its rivals is widening.
“Cloud computing is a much more complicated business than advertising and one in which Google faces stiff competition,” said Max Willens, an analyst at Insider Intelligence. “While the appeal it has among AI startups could bear fruit in the long run, it currently doesn’t help Google Cloud enough to satisfy investors.”
The company’s shares fell to $129.80 in early trading before the New York Stock Exchange opened on Wednesday, after previously closing at $138.81. Shares have gained 57% so far this year.
Alphabet President Ruth Porat said in a press interview that the unit’s sales had been hit by cost cutting by some customers. Porat continues to serve as the company’s chief financial officer while Alphabet searches for her successor following her promotion.
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The findings have tarnished an otherwise healthy report. Third-quarter revenue, excluding partner distributions, was $64 billion, Alphabet said in a filing Tuesday. Analysts had forecast $63 billion, according to data compiled by Bloomberg. Net income was $1.55 per share, compared with Wall Street’s estimate of $1.45 per share.
The company reported $44 billion in search advertising, beating the average analyst forecast of $43.2 billion.
The company was pleased with the growth of its advertising revenue after a period of “historic volatility,” Porat said in a post-earnings investor call.
The search market – which Google dominates – is facing new threats due to the rise of generative AI chatbots. These are programs that answer users’ questions in a more conversational manner when prompted. Companies like Microsoft, which supports Open AI Inc.’s ChatGPT, are challenging Google’s search lead with the new technology.
The company is eager to incorporate generative AI technology into its own products, but some in Silicon Valley say the tech giant has been too slow to recognize the market shift, creating an opportunity for its competitors.
Porat and Alphabet Chief Executive Officer Sundar Pichai said they would continue to find ways to operate more efficiently, with Porat noting that the company would maintain a “slower pace of headcount growth.” The aim of these efforts is to create as much scope as possible for investment in opportunities such as artificial intelligence.
“We will do whatever is necessary to ensure that we have the world’s leading AI models and AI infrastructure,” Pichai told investors in a call.
Google’s ongoing trial with the U.S. Justice Department over alleged abuse of its power in the search market is also weighing on Wall Street’s enthusiasm, said Evelyn Mitchell-Wolf, senior analyst at Insider Intelligence. “Any outcome should impact investor confidence in the longevity of Google’s business model.”
YouTube reported revenue of $8 billion, compared to analysts’ average estimate of $7.8 billion. The unit has weighed on Alphabet’s performance in recent quarters, but results suggest it is benefiting from the overall recovery in digital advertising spending.
Alphabet’s Other Bets — the company’s moonshot unit that includes self-driving car company Waymo and life sciences unit Verily — posted revenue of $297 million and lost $1.2 billion, falling short of forecasts corresponds to the analysts.
(Updates on pre-market trading from the first paragraph)
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