alphabetof (GOOG 0.87%) (Google 0.92%) The cloud computing business has managed to turn a profit in a very special time. While Google and its parent company clearly want their fast-growing Google Cloud platform to continue to draw financial weight over the long term, we expect these operating margins to remain positive for years to come, as expected. should not be expected.
As you know, Alphabet has many other priorities to worry about. And one of the most expensive projects is currently undergoing an exponential shift of change and opportunity. Those cloud-computing gains may have to wait a while as Alphabet optimizes its budget to power artificial intelligence (AI).
AI for everything, everywhere, at once
When Alphabet’s first quarter earnings call began, I decided to tally up how often executives mentioned AI. After 20 minutes, I put down my pencil and gave up. By that time, I had already written 32 lines on the paper, probably missing some along the way. I have a lot of respect for court stenography, but if that was my job, I would be fired.
But the big point was clear anyway. CEO Sundar Pichai and his CFO Ruth Porat couldn’t stop talking about AI. Going back to the call logs, AI got more airtime than Growth, Cloud, and Google, and was on par with Search for photo results. When Google’s owners equate his new business trend with the lifeblood of the company’s search base, we know the trend is serious.
That’s why the benefits of cloud computing will be put on the back burner for a while.
it’s not that there’s anything wrong with it
Google Cloud is already making money. Google Cloud surged 28% to $7.5 billion in a quarter when all other segments had contracted year-over-year revenues or had single-digit growth at best. This represented 10.7% of Alphabet’s total revenue, up from 8.6% in the same period last year.
The business has regained its sluggish topline while regular heroes struggle. From mainstream Google searches to his YouTube ads, everything ad-based still continues to get wind. The slowdown in digital ad sales is real, and it’s not over yet.
However, customers still needed more cloud computing and edge computing services. The AI boom we’re all talking about is exactly that trend, as Google Cloud provides the infrastructure to count for many established AI leaders and future powerhouses.
Words of wisdom from executives
Still, Alphabet management has made it perfectly clear that investing in driving growth is a top priority right now. The cloud business’s profits are great, but the company isn’t going to fight hard to keep them profitable in the near future. But you don’t have to take my word for it. Hear from the business leaders themselves.
“Cloud delivered profitability this quarter. We will continue to focus on long-term value creation,” Pichai said. “Our company Nvidiaof (NVDA 2.54%) Launch of new L4 Tensor Core GPUs and G2 VMs purpose-built for large-scale inference AI workloads such as generative AI. “
In other words, Pichai (who has AI built into his name) doesn’t mind investing heavily in expensive AI hardware as long as customers knock on it. Incidentally, the L4 core he mentioned is reportedly 120 times faster at AI-powered video analytics than general-purpose processors costing over $6,000 per chip. These decorations don’t come cheap, but Alphabet is happy to pile them up in their data centers.
CFO Ruth Porat added more fuel to the AI flames:
“In terms of operating results, we continue to focus on driving long-term profitable growth in the cloud space while continuing to invest when given significant opportunities,” he said. “We will continue to invest, especially to support long-term growth, given the opportunity to bring AI capabilities to our customers.”
AI is the first, last and all of the Alphabet
You are done. No matter what, Alphabet is putting billions of dollars of cash into its AI infrastructure instead of keeping surplus earnings in the bank. So keeping cash is very low on the company’s to-do list at this point. Alphabet also doubled the $70 billion share repurchase authorization it issued a year ago.
This rolling stone does not collect moss. Alphabet reinvests surplus funds into its backbone and the day-to-day operations of the products and services that drive its business. Google Cloud will definitely make a solid profit at some point, but I wouldn’t be shocked if the next time that item was printed in red ink again.
It’s growth-oriented business management 101. Alphabet still operates like a starving little startup, but much bigger. Yes, you’ve heard that idea from another trillion-dollar company.Its bold ambition is just one reason to own it Amazon And keep the alphabet long.
John McKee, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Fry is a member of the Motley Fool’s board of directors. Anders Bylund has positions at Alphabet, Amazon.com, and his Nvidia. The Motley Fool has positions at and recommends Alphabet, Amazon.com, and Nvidia. The Motley Fool has a disclosure policy.
