Google parent Alphabet reported second-quarter earnings after the bell on July 22, beating analysts’ expectations on both sales and earnings per share, according to LSEG data.
Alphabet’s AI fortunes are still up in the air
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Sebastian Pellejero
NEW YORK, July 22 (Reuters Breakingviews) - Chatbots threatened to upend Google’s search-engine dominance. So far, they’ve been parent company Alphabet’s GOOGL.O meal ticket. Second-quarter results from its cloud-computing arm, one of the biggest providers of AI-serving data centers, blew past analysts’ expectations. Yet its core search business saw an unusual hiccup, slowing slightly from last quarter’s clip. The $4 trillion company’s rich valuation masks two halves moving at different speeds.
Spending on advanced servers is generating plenty of business. Google Cloud sales came in around 10% ahead of Wall Street’s forecasts, according to Visible Alpha data, while operating profit beat by 26%. That should help soothe some concerns about the company’s expected $187 billion of capital expenditures this year.
Alphabet’s core search unit, by contrast, did merely fine. Revenue grew 17% year-over-year, in line with expectations, but below the previous quarter’s pace. Operating profit margin for the company's services segment, which includes advertising network sales and YouTube, fell just shy of analysts’ hopes.
To be sure, the query business is hardly broken. Some 76% of users recently surveyed by Evercore still name Google as their primary search engine. Users of generative AI tools claim to search more, not less. Gemini, Google’s in-house chatbot, now boasts 950 million monthly active users, within striking distance of ChatGPT.
Staying ahead of that chatbot competition means making risky changes to the business, though. Google now tops many searches with an AI-written answer, pushing blue links, and the traffic they carry, further down. Some irate publishers, including online forum Reddit RDDT.N, are now weighing whether to block the company’s web crawlers altogether, the Wall Street Journal reported.
Investors thus far seem to trust boss Sundar Pichai to strike a delicate balance. Of the large cloud computing providers, which include Microsoft MSFT.O, Amazon.com AMZN.O, Meta Platforms META.O, and Oracle ORCL.N, only Alphabet has beaten the benchmark S&P 500 Index over the past year.
Maintaining this leadership, especially as rivals OpenAI and Anthropic charge ahead, will only get more difficult. Google’s flagship AI model is now months overdue, while recent releases have underwhelmed on technical benchmarks. Granted, the company has many ways – from servers to self-designed chips, YouTube and beyond – to benefit from the AI wave. If cracks in some businesses begin to appear, though, staying ahead in the others becomes all the more imperative.
