(Bloomberg) — Google-parent Alphabet Inc.’s shares fell after the company poured more resources into its effort to beat rivals in artificial intelligence, with a spending surge that exceeded analysts’ expectations.
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Google said on Tuesday that second-quarter capital spending rose to $13.2 billion to support the company’s AI programs and computing power needs, beating the $12.2 billion analysts had expected.
Google once had a lead in the AI race because it developed much of the technology underlying popular chatbots, but now the company is under pressure to prove it can hold its own against companies like OpenAI and Microsoft that are pushing chatbots that pull people away from traditional web searches and answer users’ questions in a conversational way.
Google is rushing to build artificial intelligence into all of its widely used products, including Gmail, Google Docs and search, while bolstering its own AI capabilities, but it’s an expensive endeavor that has had mixed results.Some investors want clearer evidence of a return on the billions of dollars they’ve poured into AI advances, said Daniel Morgan, senior portfolio manager at Synovus Trust.
“How much money are they making off of that?” he said. “If you look at this report, you’ll see that Google is the same as it’s always been. They make money from advertising and search.”
Alphabet shares were down 4% as of 9:45 a.m. on Wednesday in New York. The stock closed at $181.79 and is up 30% this year.
Investor concerns about Alphabet’s spending put a strain on better-than-expected sales in the quarter, which was boosted by demand for cloud-computing services and search-ad revenue.
The company said in a statement that second-quarter revenue, excluding payments to partners, was $71.36 billion. Analysts had expected $70.7 billion, according to data compiled by Bloomberg. Net income was $1.89 a share, beating Wall Street’s estimate of $1.84 a share.
Google Cloud earned $1.17 billion, beating analysts’ expectations of $982 million in operating profit. Google still lags Amazon.com Inc. and Microsoft Corp. in the cloud-computing market, but the unit has won business from artificial intelligence startups over the past year. Investors are also eyeing Google Cloud as the division most likely to drive growth for Alphabet overall, especially as its search business matures.
“Our strength in AI, AI infrastructure and generative AI solutions for our cloud customers certainly helps,” Alphabet Chief Investment Officer Ruth Porat said in a media call. “Our customers are certainly relying on us to build out their own capabilities.”
In May, Google unveiled AI profiles for search written by its generative artificial intelligence technology, but the feature’s rollout was a mixed bag. Some of the AI profiles made embarrassing suggestions, such as advising users to eat a stone or put glue on pizza. Still, Google’s search ad revenue for the quarter was $48.5 billion, beating analysts’ average estimate of $47.6 billion.
“If consumers are willing to take the trouble to search elsewhere, Google will continue to generate higher search traffic revenue than its competitors,” said Evelyn Mitchell Wolf, an analyst at eMarketer.
YouTube reported revenue of $8.66 billion, compared with the $8.95 billion that analysts had expected on average. Of Alphabet’s various businesses, YouTube is the most vulnerable to fluctuations in the digital advertising market.
Alphabet’s “other investments,” a collection of breakthrough business units including life sciences business Verily and self-driving car maker Waymo, earned $365 million in revenue but posted an operating loss of $1.13 billion, bigger than analysts’ projections for a loss of $1.07 billion. Alphabet has recently been pushing for these units to be spun off as independent startups rather than become divisions of the parent company.
In its latest filing, Alphabet reported that it had $100.7 billion in cash, cash equivalents and marketable investments, down from $108 billion in the first quarter.In recent months, Google has expressed interest in acquiring two companies, both of which would have been the internet giant’s largest acquisitions ever, but both deals fell apart.The acquisitions of HubSpot and Wizz were supposed to bolster the company’s cloud and cybersecurity offerings and help it compete with tech rivals.
“We are always looking for opportunities to diversify our portfolio and will continue to do so if we find the right combination of factors, including value,” Porat said, while declining to comment on the negotiations with Wizz. “Regulatory scrutiny is not new to us and we have successfully managed regulatory review of a number of larger transactions in the past.”
Later this month, veteran Eli Lilly & Co. executive Anat Ashkenazi will join the search giant as its chief financial officer. Porat, Alphabet’s longest-tenured CFO, will stay on as president and chief investment officer and spend more time considering the company’s other investment portfolios.
–With assistance from Ed Ludlow and Shona Ghosh.
(Updates stock prices.)
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