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Alphabet (GOOG) Shares Drop 7% as Cloud Business Misses Estimates in Q3 2023
Alphabet Inc (NASDAQ: GOOG), the parent company of Google, experienced a nearly 7% drop in its shares in pre-market trading to $129.39. This decline in Alphabet stock came as a surprise, especially after the tech giant reported an 11% increase in revenue for Q3 2023. The dip in share prices primarily stems from Alphabet’s cloud business falling short of analysts’ expectations.
Alphabet’s Strong Q3 Results with a Cloudy Outlook
For the third quarter this year, Alphabet reported Earnings Per Share of $1.55, surpassing the $1.45 per share that was expected by LSEG (formerly known as Refinitiv). The revenue for the quarter amounted to $76.69 billion, again exceeding the $75.97 billion predicted by LSEG. These figures signify a remarkable rebound in the advertising sector, pushing the company’s expansion into double digits for the first time in over a year.
However, it’s the numbers within Alphabet’s report that reveal the cause of concern. While YouTube advertising revenue exceeded expectations at $7.95 billion, Google Cloud revenue fell slightly short at $8.41 billion.
Despite this, the cloud unit still managed to grow by 22% compared to the same period the previous year, which was double the rate of expansion for the company as a whole. It is also notable that the cloud business turned an operating profit of $266 million, a significant improvement from the $440 million loss in the same period the year before.
Alphabet CEO Sundar Pichai emphasized that the cloud business remains a key area of investment for the company as it seeks to compete with Amazon Web Services and Microsoft Azure.
Ruth Porat, Alphabet’s finance chief, noted that cloud growth “remained strong across geographies, industries, and products”. However, the slower expansion rate was attributed to “customer optimization efforts”, a term commonly used to describe clients reducing their spending on cloud services.
Alphabet’s Race to Integrate Generative AI
With the increasing importance of generative Artificial Intelligence (AI), companies are turning to public cloud services to handle demanding workloads. While Alphabet’s cloud unit demonstrated growth, the market’s consensus suggests that it needs to become more profitable to satisfy investor expectations.
Alphabet’s efforts to integrate generative AI technology into more products have been noticeable since the launch of OpenAI’s ChatGPT chatbot late last year.
The company is currently testing generative AI technology within its core search, with the goal of providing more creative and comprehensive answers to text queries. The potential impact of this technology on Google’s search and advertising business is substantial, as it could change the way people seek information online.
Much of Alphabet’s year has been characterized by cost-cutting efforts after years of substantial growth. In January, the company announced a significant reduction in its workforce, affecting approximately 6% of its full-time employees. These measures were followed by additional layoffs within various business organizations, such as the news division and the self-driving car unit, Waymo.
Alphabet (GOOG) Shares Drop 7% as Cloud Business Misses Estimates in Q3 2023
