- Alphabet's strong first-quarter results showed that its parent company, Google, can simultaneously grow ad sales and manage costs in the AI field.
- Revenue increased by 15%, the highest growth rate since early 2022, and profits from the cloud business more than quadrupled.
- Alphabet's market capitalization exceeded $2 trillion as the stock price rose after the market closed.
Alphabet came into Thursday's earnings report facing concerns about the growth of its core Google advertising business and the company's ability to generate returns from its heavy investments in artificial intelligence.
The company has calmed Wall Street's fears, at least for the time being.
Alphabet beat analyst expectations and reported a 15% increase in revenue for the quarter, its fastest rate of expansion since early 2022. Ad sales on YouTube increased by 20%, which also exceeded expectations.
Questions swirl about the future of Google's online advertising. That's because search, while still the biggest source of revenue, is under pressure as new generative AI services like OpenAI's ChatGPT give consumers new ways to access information.
“We're very pleased with the momentum in our advertising business,” Alphabet finance chief Ruth Porat said on Thursday's earnings call after the report. “Search has experienced widespread growth.”
Alphabet shares rose 12% in after-hours trading, pushing the company's market capitalization to more than $2 trillion. Before the report, the stock had risen 12% for the year, outperforming the Nasdaq Composite but lagging some of its mega-cap peers such as Meta, Nvidia and Amazon.
The first quarter results showed the company's core advertising business is accelerating again after a difficult 2022 and 2023, when brands hoarded spending to combat rising interest rates and inflation concerns. Growth is spreading across the digital advertising market, with Meta reporting 27% growth in the first quarter, the fastest since 2021, and Snap reporting 21% growth, leading to early 2022. This is a level not seen since then.
Alphabet has been cutting costs since last year in anticipation of slowing growth in advertising and increased spending on AI, which saw competition sharply intensify last year. The company also experienced a series of apparent failures related to the rushed launch of various AI products.
There were other reasons for skepticism ahead of Alphabet's earnings release.
Investors turned their attention to Meta after Wednesday's first-quarter report, sending the stock down as much as 19% in after-hours trading. CEO mark zuckerberg Despite relying on advertising for 98% of its revenue, Meta said at the beginning of an investor conference call that it plans to invest billions of dollars in areas such as artificial intelligence and the Metaverse.
Like Meta, Alphabet is also pouring money into AI. But that investment is turning into sales.
Revenue from Google Cloud, which houses much of the company's AI technology, rose 28% year over year to $9.57 billion, beating expectations. Operating profit more than quadrupled his to $900 million, showing that Google is finally generating significant profits after years of pouring money into the business to compete with Amazon Web Services and Microsoft Azure. .
Last month, Alphabet announced a series of products including Vertex AI, a no-code console for enterprise companies to build their own AI agents.
“We had a lot of questions last year, but we always had confidence and reassurance that we could improve the user experience,” CEO Sundar Pichai said during an earnings call Thursday.
Citing rollouts in the U.S. and U.K., Pichai said there was “early confirmation” that the company could use AI to expand its search capabilities, and the company plans to expand spend management and AI tools in the coming quarters. He said that both can be done at the same time.
To show how confident it is in the company's financial health, Alphabet announced its first-ever quarterly dividend of 20 cents per share and plans to buy back an additional $70 billion in stock.
Now that its first-quarter results are in the rearview mirror, Alphabet must meet rising expectations. As competitors deploy more generative AI products, expectations will only increase. And the company only has a few more quarters left where its growth will match some of its worst performance in history.
“We are facing a new cost reality,” Prabhakar Raghavan, senior vice president of search, said at a recent all-hands meeting, urging employees to work more efficiently.
Raghavan added that the company is “spending a lot more on machines” thanks to generative AI, adding that organic growth has slowed and the number of new devices coming into the world is “not what it used to be. ” he said.
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