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Alphabet’s revenue grew 14% in the second quarter, but the double-digit growth in advertising suggests that AI chatbots like OpenAI’s ChatGPT have yet to make an impact on searches on the company’s flagship search engine.
Further strong growth in the cloud computing business demonstrated the robust demand for computing and data services as major technology companies and startups race to build large-scale language models and integrate AI into their businesses.
Google’s parent company said on Tuesday that revenue rose to $84.7 billion from $74.6 billion for the three months ended June, beating analysts’ average estimate of $84.2 billion. Net income was $23.6 billion, up 28 percent from a year earlier and again slightly above expectations.
“This performance demonstrates incredible momentum in search and great progress in cloud, with our AI initiatives driving new growth,” said Chief Executive Sundar Pichai, who has faced criticism for being slow to commercialize large-scale language modeling technology, originally invented by Google researchers but popularized by OpenAI through a $13 billion partnership with rival Microsoft.
Alphabet’s shares, trading after hours, have risen by nearly a third this year, giving it a market capitalization of $2.26 trillion, making it the world’s fourth-most valuable public company after Apple, Microsoft and Nvidia.
Advertising revenue, which makes up the bulk of Google’s revenue, rose 11% to $64.6 billion, in line with consensus estimates, but the growth rate slowed from the previous quarter, disappointing analysts. YouTube advertising revenue rose 13% to $8.7 billion, while Google Cloud services grew 29% to $10.3 billion.
The results “were not as convincing as the first quarter. [the earnings] “The beats were more broad-based,” Jefferies analyst Brent Till said. “It wasn’t anything to get excited about.”
Google is one of the first of the so-called “Magnificent Seven” tech companies to report earnings, and its results are closely watched for signs of how its massive spending on generative AI is translating into revenue growth.
Alphabet’s capital expenditures rose again to $13 billion, up $1 billion from the previous quarter and nearly double the $6.9 billion it planned for the same period in 2023. That reflects a surge in investments in data centers, new chips for training and running AI models, and the development of its own suite of AI products called Gemini.
“We are in the early stages of a very transformative space, and in a technology industry in such a transitional period, the risks of underinvesting are dramatically greater than overinvesting,” Pichai told analysts. “There are much more significant downsides to not investing to get ahead here.”
Pichai claimed that Google’s generative AI services for customers have already generated “billions of dollars” in new revenue and are used by 2 million developers.
Still, Google had a rocky start in its efforts to integrate AI into its products: When AI-generated summaries were first introduced into US search results, they told users that eating rocks was good for their health, advised them to put cheese on their pizza, and called former US President Barack Obama a Muslim.
The earnings came a day after Google abandoned its proposed $23 billion acquisition of Israeli cybersecurity company Wiz, which would have been the company’s largest acquisition ever.
According to the Financial Times, directors of both companies were concerned about whether the deal could be approved by U.S. antitrust regulators, and when word leaked that talks were underway, skeptics stepped up lobbying against the deal, which ultimately fell apart.
Chief Financial Officer Ruth Porat declined to comment on why the talks fell apart but said Google would continue to pursue opportunities to diversify its portfolio “if we find the right combination of factors, including value.”
“Regulatory scrutiny is not new to the company and we have successfully managed regulatory reviews of a number of large transactions in the past,” she added.
The company announced a second-quarter dividend of 20 cents per share, totaling about $2.5 billion. The payout follows Google’s first dividend payout earlier this year and marks a break from its previous policy of solely using stock buybacks to return money to investors.
Porat added that Google plans to invest another $5 billion in Waymo, the self-driving taxi service that recently expanded from San Francisco to Phoenix, Los Angeles and Austin.
Additional reporting by Nicholas Megaw
