Alphabet Shares Fall After Search Revenue Misses Estimates

(Bloomberg) — Alphabet Inc. reported fourth-quarter revenue from its core search advertising business that fell short of analysts’ estimates, overshadowing an otherwise strong end to the year.

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Sales, excluding partner payouts, jumped 15% to $72.3 billion in the three months ended Dec. 31, the company said Tuesday in a statement. That was better than the $71 billion analysts had projected, and the best quarter for revenue growth in seven. Net income was $1.64 per share, compared with Wall Street’s estimate of $1.59 per share.

But revenue in Alphabet’s core search business was $48 billion, narrowly missing analysts’ projections for $48.15 billion. The shares fell 6.5% in extended trading.

The disappointing results come at a time of broader uncertainty for Google’s search engine, which has dominated the global internet for years and is the subject of a major antitrust case. Its leading position is threatened by new competition as the rise of generative AI has enabled companies like Microsoft Corp. and OpenAI to deliver programs that answer users’ questions in a more conversational fashion, like the wildly popular chatbot ChatGPT.

“Google advertising does make up the vast majority of its revenue and as it prepares to really go full throttle on all of its carefully laid plans in AI, having that cash cow experience volatility doesn’t bode well,” said Evelyn Mitchell-Wolf, an analyst at Insider Intelligence.

Wall Street had high expectations for Alphabet’s efforts in AI, pushing the stock up almost 60% over the past 12 months, valuing the company at nearly $2 trillion. But now investors are looking for a sense of when the technology will actually start moving the needle for earnings and revenue.

“Google has kind of reached a new phase in its maturity where really strong explosive growth every quarter is just not feasible any more,” Mitchell-Wolf said. “The stock market just hasn’t quite caught up to that reality yet.”

Google has raced to weave the new AI technology into its own products, and last month released its most powerful large language model, called Gemini. But Alphabet has been dogged by concerns that it’s been too slow to capitalize on the shift in the market and has been playing catch up to Microsoft in the AI race.

As Chief Executive Officer Sundar Pichai plows resources into AI and other big priorities, executives have scrutinized operations to identify places where they can make cuts. Earlier this year, the company eliminated hundreds of employees in areas including hardware, engineering, and the moonshot technology lab X. More rounds of layoffs may follow this year, Pichai has said. Google had 182,502 employees as of Dec. 31, a 4% decline from a year earlier.

President and Chief Executive Officer Ruth Porat said Google is continuing to invest in “top engineering and technical talent,” and “where possible, in support of our growth opportunities we are reallocating talent across Alphabet.”

In the last three months of the year, Google’s closely watched cloud unit brought in an operating profit of $864 million, more than double analysts’ estimates for $427 million. Google still trails Microsoft and Inc. in the market for cloud computing, but this quarter’s results mark Google Cloud’s first full year of profitability, pointing to a relatively healthy business unit.

“We are really pleased with the cloud growth,” Porat said on a call with reporters. “With respect to profitability, cloud has been focused on efficiency for quite some time and you’re seeing the benefit in the fourth quarter.”

Google’s push into AI hasn’t come cheap. Capital expenditures increased by $2.96 billion from the previous quarter, a bump Porat attributed directly to its investment in AI. Cash on hand also dropped by about $9 billion from the previous quarter as the company seeks to allocate resources properly. Porat said capital spending this year will be “noticeably larger” than in 2023.

The company has been vying for years to diversify beyond the product that made it a household name. YouTube, one of its prized businesses, reported $9.2 billion in revenue, compared with analysts’ average estimate of $9.16 billion. The unit has been the most susceptible to marketers’ pullback in spending as the digital ad market floundered in the past year.

Alphabet’s Other Bets — the company’s moonshot unit that includes the self-driving car effort Waymo and the life sciences unit Verily — brought in $657 million in revenue while losing $863 million in operating income. That was still less than analysts’ projection for a loss of $1.3 billion.

“We are investing with other bets where we see opportunities for high impact returns,” Porat said.

The Google Network business, in which the company serves up ads on other parts of the internet, saw its revenue decline by 2% to $8.3 billion. That business, which has been an ongoing weak spot in Alphabet’s results, will be at the center of an antitrust trial later this year.

–With assistance from Ed Ludlow.

(Updates with additional analyst and executive comments)

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