Abstract:
Alphabet Inc. The stock price once fell by more than 13%, and the market value evaporated by more than 500 billion US dollars. The scale of market value reduction in a single day set a company record. The company previously reported disappointing revenue from its search and advertising businesses, exacerbating investor concerns that artificial intelligence (AI) threatens its core business.
The Google parent company reported third-quarter revenue excluding partner revenue of $111.2 billion, below analyst forecasts. Advertising revenue from search and other channels also fell short of expectations, growing at the slowest pace in five quarters. The business accounts for about half of the company's total revenue and is a key source of funding for huge investments in AI.
JPMorgan analysts Doug Anmuth and others said in a research report that performance and stock price reactions show that for ultra-large-scale cloud service providers that have invested hundreds of billions of dollars in building AI infrastructure, there is little room for error once core business performance is disappointing.
As of 9:35 a.m. New York time, Alphabet's stock price fell 13% to $281.37, and its market value evaporated by $511 billion. This is in sharp contrast to the performance of competitor Microsoft. Microsoft's cloud business grew faster than Wall Street expected while controlling spending, driving up its stock price.
Google Chief Commercial Officer Philipp Schindler said on an earnings call on Wednesday night that the increasing popularity of the newly launched AI Mode tab in Google search has caused a drag on the company's performance. He said that AI queries have "low monetization capabilities," but the company remains optimistic about it and plans to place more ads in this section of the search engine.
For years, Google executives have argued that AI chatbots and related features would not significantly erode its search business. But as consumers turn to ChatGPT, Claude and Google's own AI capabilities, investors are worried that this will impact the company's core profit sources.
Alphabet CEO Sundar Pichai is under increasing pressure to justify Google's more than $1 trillion in future payment obligations for resources such as data centers, computing power and electricity. Investing.com senior analyst Thomas Monteiro said: "This quarter feels like a critical moment for Alphabet: Either Pichai and his team solve the AI monetization problem, or the giant may lose its leadership position in several core businesses in the near future."
Monteiro said that unless Google proves that it can make money on AI, as it has in the past on search advertising, every capital expenditure forecast it releases will look less like a show of ambition and more like a bill.
Google is building AI infrastructure for itself and its customers, driving capital expenditures to record levels. The company is using AI to transform popular products like its search engine, YouTube and Gmail, but those efforts have yet to generate the revenue that investors expect to justify its massive spending.
Total revenue from Google's services business in the third quarter was US$96.3 billion, lower than the expected US$98.4 billion. YouTube advertising revenue of $11.2 billion was also lower than expected.
The company's free cash flow was negative for the second consecutive quarter, the first time it has been negative for two consecutive quarters since its listing.
Alphabet's equity investments also weighed on the company's profits. These investments recorded losses of US$8.7 billion, largely due to Alphabet's stake in SpaceX. This was in sharp contrast to investment gains a year ago and huge gains in the second quarter, which came mainly from investments in SpaceX and a private company later identified as Anthropic PBC.
Alphabet’s third-quarter net profit per share was $2.12, well below Wall Street’s forecast of $2.99.
One bright spot in the financial report is Google Cloud, which is seen as an important indicator of demand for the company's AI products and managed services. Google Cloud’s revenue was US$30.7 billion and profit was US$11.1 billion, both higher than analysts’ expectations of US$29.1 billion and US$9.8 billion. The business's big customers include startups like Anthropic that compete with Google in the AI race.
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