Google's Offensive Nets 15% Growth, YouTube and Cloud Surge

Key Takeaway

• Alphabet Inc. reports a 15% revenue growth, led by a 20% increase in YouTube ad sales, pushing its market cap past $2 trillion.
• Google Cloud's revenue surged 28% to $9.57 billion, with operating income quadrupling to $900 million, underscoring profitable AI investments.
• Announced a first-ever quarterly dividend of 20 cents per share and plans for an additional $70 billion stock repurchase.

Alphabet Surpasses Expectations

Alphabet Inc., the parent company of Google, has reported a significant revenue growth of 15% for the quarter, marking its fastest rate of expansion since early 2022. This growth was notably led by a 20% increase in ad sales at YouTube, surpassing analysts' expectations. Alphabet CFO Ruth Porat expressed satisfaction with the momentum of their ads businesses, highlighting broad-based growth in search. The company's shares saw a 12% increase in extended trading, pushing its market cap past $2 trillion. This performance comes amid concerns regarding the growth of Google's core ads business and its investments in artificial intelligence (AI).

AI Investments Yielding Results

Alphabet's commitment to AI is evident in its Google Cloud division, where revenue jumped 28% to $9.57 billion, significantly ahead of estimates. Operating income in this division more than quadrupled to $900 million, indicating that Google is beginning to see substantial profits from its years of investment in cloud computing to compete with Amazon Web Services and Microsoft Azure. CEO Sundar Pichai mentioned early confirmations of using AI to expand search capabilities, demonstrating the company's ability to manage spending and monetize AI tools effectively.

Strategic Moves and Market Response

In a bold move, Alphabet announced its first-ever quarterly dividend of 20 cents per share and a plan to repurchase an additional $70 billion in stock. This decision reflects the company's confidence in its financial position and its strategic direction, particularly in AI. Despite the positive reception of Alphabet's earnings report, the company faces heightened expectations and the challenge of maintaining growth as it navigates a new cost reality and invests heavily in generative AI.

Street Views

• Doug Anmuth, JPMorgan (Bullish on Alphabet):

  "In terms of AI, after what seemed like a year-plus of coming from behind, we believe GOOGL is beginning to go on the offensive... The company is starting to bring AI responses into the main Search results page, & it is seeing an increase in Search engagement & satisfaction among AI users." "Management also expressed confidence that the shift to Generative AI in Search will expand the Search market opportunity, just as GOOGL saw with the shift to mobile & voice."

• Ross Sandler, Barclays (Bullish on Alphabet):

  "Google is in the sweet spot of accelerating growth, expanding margins while shipping product faster, and returning capital – basically proving the naysayers wrong."

• Brent Thill, Jefferies (Bullish on Alphabet):

  "Google’s acceleration in core ad and cloud revenues were a bright spot for Thill..."

• Jason Helfstein, Oppenheimer (Bullish on Alphabet):

  "...citing Google’s accelerating ad business as a driver of operating leverage..."

• Justin Post, Bank of America (Cautiously Optimistic on Alphabet):

  "The quarter beat expectations across all major business lines... Google is a beneficiary of AI. Search is still not without disruption risk..."

• Ken Gawrelski, UBS (Neutral/Cautious on Alphabet):> "Accelerating search growth forestalls our worries about search deceleration but does not change our views on digital ad share loss and risks associated with a search format transition."