Alphabet posted mixed quarterly earnings on Wednesday, clarifying the company’s position in the streaming and AI sectors.
Alphabet (Google) stock dropped almost 5% on Wednesday after the tech giant released its second-quarter earnings report on Wednesday. Investors fear a contraction of the video streaming segment and too much focus on artificial intelligence, shrinking the company’s margins.
Total ad revenues in the April-June period came in at $64.62 billion, a 14% annual increase and more than expected by LSEG-polled economists. Combined revenues amounted to $84.74 billion versus $84.19 billion expected. Earnings per share came in at $1.89 versus $1.84 expected.
Investors were mainly worried that YouTube, the world’s largest video service, is starting to lose ground against its competitors. YouTube reported $8.66 billion in ad revenues, less than the $8.93 billion expected. That represents a 13% annual increase versus a 21% jump in the first quarter.
YouTube is facing increasing competition from TikTok, the video-based Chinese social network. Ad revenues are also being increasingly diverted to traditional streaming services like Netflix, Amazon Prime Video, and Disney+. Most streaming platforms implemented cheaper, ad-based subscription tiers to help their businesses turn a profit.
Alphabet “sounded quite conservative about the outlook for the second half of the year,” Bernstein analysts told Reuters.
“Perhaps this is Google’s way of setting an easy bar for the new CFO to come in against the next quarter. Or perhaps there’s some truth to the conservatism and we are entering an uncomfortable period for the digital advertising names with decelerating growth and rising costs.”
Profitable AI bet
The latest quarterly earnings showed Alphabet’s bet on artificial intelligence is already paying out despite the immense research & development costs it entails.
Cloud revenues, mostly driven by AI, jumped 28.8% year-on-year to $10.35 billion, more than expected. The cloud segment also turned over $1 billion in profit.
Besides Microsoft, Alphabet is the biggest tech company that has invested in artificial intelligence. Last year, the company released its response to OpenAI’s ChatGPT: a Google-integrated chatbot called Gemini.
Gemini received significant backlash as it appears to “hallucinate” much more than ChatGPT without having noticeably better capabilities. In two infamous instances, Gemini suggested “eat one rock a day” and “make pizza with non-toxic glue” to users.
Nevertheless, the software shows much more potential than any other ChatGPT alternative. Moreover, Google has the infrastructure to create a powerful AI-backed cloud system, which already proved to be profitable.
“We continue to view Google as an AI winner and find core product improvements encouraging,” Piper Sandler analysts told Reuters.
Alphabet is still very much in the AI race, although several other tech giants including Amazon are looking for ways of getting in.
