SAN FRANCISCO: Alphabet Inc posted disappointing sales from most of its core businesses in the third quarter (3Q), escalating investors’ concerns about the hundreds of billions of dollars that the company is spending on artificial intelligence (AI).
The stock fell in late trading.
The Google owner said sales, excluding partner payouts, were US$111.2bil for the three months that ended Sept 30, slightly missing analysts’ projections.
The company’s advertising revenue, which it depends on to fund AI investments, totalled US$82bil, below estimates of US$83.6bil.
Sales from its search and related businesses also missed forecasts.
Google’s race to build AI infrastructure for both itself and its customers has sent its capital expenditures soaring to record levels. Alphabet chief executive officer Sundar Pichai is facing increasing pressure from investors to justify the spending.
The firm is working to develop AI models and integrate them into consumer products such as the search engine, YouTube and Gmail, but the returns from those efforts have yet to eclipse the company’s massive investments.
Alphabet’s shares were down nearly 11% in after-hours trading.
“This quarter feels like a moment of truth for Alphabet: Either Sundar and his team fix the way the company monetises AI, or the giant risks losing its leadership in several of its core businesses in the near future,” said Thomas Monteiro, senior analyst at Investing.com.
“The cash furnace continues to weigh more on Alphabet than on the competition, mainly because of the revenue side.”
At the end of 3Q, Google said it had future purchase commitments of US$924bil and pre-commencement leases and other obligations of US$152bil, bringing total future liabilities to well over US$1 trillion.
Net income was US$2.12 a share, falling far below Wall Street’s estimate of US$2.99, with equity investments weighing on Alphabet’s bottom line.
Those stakes posted an US$8.7bil loss, in large part due to its SpaceX position.
That’s a sharp reversal from the gains it saw a year earlier and the windfall in 2Q that was mainly driven by SpaceX and an investment in a private company that Bloomberg later identified as Anthropic PBC.
The disappointing results overshadowed what was otherwise a solid beat for Google’s cloud unit, a key gauge of demand for the company’s AI products and hosting services. The division reported sales of US$30.7bil and profit of US$11.1bil, above analyst estimates of US$29.1bil in revenue and US$9.8bil in profit.
“This is a snag in the AI boom story, not a break in it,” Ethan Feller, a strategist at Zacks Investment Research, said in a note.
“Demand is clearly there; 103% cloud growth settles that question. Whether this becomes a wrench in the broader AI narrative depends on how the rest of the hyperscalers report this week.”
Alphabet said in July that capital expenditures will reach as much as US$205bil this year, more than double what it spent last year. AI requires massive amounts of computing power, and Google is racing to build data centres so it can meet demand for AI from consumers, businesses and its own employees.
Over the past few years, Google has been hustling to reinvent its search engine for the AI age, trying to keep consumers in the habit of relying on its answers even as chatbots from OpenAI and Anthropic become more popular.
The company now delivers AI-generated answers in response to many searches, a shift that has had major implications for businesses that have traditionally relied on the search giant for traffic and advertising revenue.
Google told analysts, however, that the AI mode queries had weighed on Google’s search-related revenue growth, saying it was seeing “lower monetisation” in AI mode. — Bloomberg
