Alphabet tempers fears that it’s falling behind in AI with blowout first-quarter results

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Alphabet tempers fears that it’s falling behind in AI with blowout first-quarter results

Google CEO Sundar Pichai speaks in conversation with Emily Chang during the APEC CEO Summit at Moscone West on November 16, 2023 in San Francisco, California. The APEC summit is being held in San Francisco and runs through November 17. 

Justin Sullivan | Getty Images News | Getty Images

Alphabet went into its earnings report on Thursday facing concerns about the growth of its core Google ads business and the company’s ability to generate profits from its hefty investments in artificial intelligence.

For the time being at least, the company put Wall Street’s fears to rest.

Alphabet topped analysts’ estimates, reporting revenue growth of 15% for the quarter, the fastest rate of expansion since early 2022. Ad sales at YouTube jumped 20%, also beating expectations.

Questions have been swirling about the future of Google’s online ads, because the biggest revenue driver remains search, which is under pressure as new generative AI services like OpenAI’s ChatGPT offer consumers new ways to access information.

“We’re very pleased with momentum of our ads businesses,” Alphabet finance chief Ruth Porat said on Thursday’s earnings call after the report. “Search had broad-based growth.”

Alphabet shares jumped 12% in extended trading, pushing the company’s market cap past $2 trillion. Prior to the report, the stock was up 12% for the year, ahead of the Nasdaq Composite but trailing some mega-cap peers like Meta, Nvidia and Amazon.

First-quarter results showed the core advertising business is reaccelerating after a difficult 2022 and 2023, when brands reeled in spending to contend with rising interest rates and inflationary concerns. Growth is spread across the digital ad market, with Meta reporting 27% growth for the first quarter, the fastest since 2021, and Snap reporting growth of 21%, a level not seen since early 2022.

Alphabet has been on a cost-cutting spree since last year in anticipation of slower ad growth and increased spending on AI, where competition has grown rapidly in the last year. The company has also experienced a series of apparent missteps tied to the rushed launch of various AI products.

There were other reasons for skepticism ahead of Alphabet’s earnings report.

Investors turned on Meta after its first-quarter report on Wednesday, sending the stock down as much as 19% in extended trading. CEO Mark Zuckerberg opened the investor call saying he planned to spend billions of dollars investing in areas like artificial intelligence and the metaverse, even though Meta counts on advertising for 98% of its revenue.

Like Meta, Alphabet is pouring money into AI. But its investments are turning into sales.

Revenue in Google Cloud, which houses much of the company’s AI technology, jumped 28% from a year earlier to $9.57 billion, sailing past estimates. Operating income more than quadrupled to $900 million, showing that Google is finally generating substantial profits after pouring money into the business for years to keep up with Amazon Web Services and Microsoft Azure.

Last month, Alphabet announced a suite of products, including Vertex AI, a no-code console for enterprise companies to build their own AI agents.

“There were a lot of questions last year and, you know, we always felt confident and comfortable that we would be able to improve the user experience,” CEO Sundar Pichai said on Thursday’s earnings call.

Pichai said he’s seen “early confirmation” that the company can use AI to expand search’s capabilities, citing rollouts in the U.S. and the U.K. He said the company can both manage spending and monetize AI tools at the same time in the coming quarters.

To show how confident the company is in its financial position, Alphabet announced its first-ever quarterly dividend of 20 cents per share and a plan to repurchase an additional $70 billion in stock.

With first-quarter results in the rearview mirror, Alphabet now has to keep up with heightened expectations, which will only increase as competitors roll out more generative AI products. The company also only has a couple more quarters in which growth will be comparable to some of its weakest results on record.

“We’re in a new cost reality,” Prabhakar Raghavan, a senior vice president who oversees search, said at a recent all-hands meeting, urging employees to work more efficiently.

With generative AI, the company is “spending a ton more on machines,” Raghavan added, saying organic growth is slowing and the number of new devices coming into the world “is not what it used to be.”

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