Alphabet, Google's parent company, reported second-quarter earnings that exceeded analysts’ expectations, driven by robust demand for cloud-computing services and its core search engine advertising.
Despite beating expectations, shares were slightly lower by -2.15% in after-hours trading.
Alphabet’s revenue, excluding partner payouts, reached $71.36 billion, surpassing the $70.7 billion forecast. Net income stood at $1.89 per share, beating Wall Street’s $1.84 estimate.
Key highlights included a significant operating margin improvement, expanding by 300 basis points to exceed 30%. This was attributed to strong performances in both core search and Google Cloud. The cloud segment, in particular, saw profitability due to increased demand for generative AI workloads, which also contributed to a top-line acceleration and a year-over-year margin expansion of 650 basis points. Despite a slight miss in YouTube ad revenue, primarily due to weaker brand ad pricing, the overall financial performance was strong.
Alphabet’s integration of Gen-AI features through the Gemini 1.5 Pro model into its core search business is expected to sustain mid-teens revenue growth and maintain high operating margins. This innovation, alongside strong cloud profitability, helps counterbalance increased capital expenditures, which were 50-60% above historical levels, reaching $13.2 billion compared to the $12.2 billion anticipated by analysts.
The company’s YouTube TV and Premium services continue to grow, with subscription sales now surpassing a $15 billion annual run rate. This growth helps mitigate declines in Google Play store revenue. Alphabet’s Other Bets, including the self-driving car unit Waymo, contributed $365 million in revenue but posted an operating loss of $1.13 billion, steeper than analysts’ predictions.
Alphabet is under pressure to demonstrate the return on its substantial AI investments, especially as competition intensifies from companies like OpenAI and Microsoft. Despite mixed results in some AI applications, such as the flawed AI Overviews for search, the company remains committed to integrating AI across its product lineup.
Looking ahead, Alphabet’s core search strength is likely to continue, bolstered by the Gemini integration. Cloud profitability is expected to remain a bright spot, despite higher depreciation expenses in the second half of the year. With a positive outlook on AI advancements and new product developments, Alphabet aims to sustain growth. Investors will closely watch the rollout of AI-driven features and the performance of the cloud segment as key drivers of future growth.
Overall, while shares are slightly weaker in after-hours trading, there is nothing overly concerning about this, especially in light of gains in the share price over the past 12
months. Analysts also maintain a positive view, with 83% having a buy recommendation, with an average price target of $201.92 implying a 10% upside potential over the next year.
