Alphabet Beats Q2 Estimates with Cloud Growth, Rising AI Investments

Google parent Alphabet reported its fiscal second-quarter earnings on Tuesday, surpassing analysts' estimates. The company posted earnings per share of $1.89 on revenue of $84.7 billion, exceeding expectations of $1.85 on revenue of $84.3 billion. This marks a significant increase from the same period last year, where earnings per share were $1.44 on revenue of $74.6 billion, showing a 31% and 14% jump, respectively.

Advertising Revenue and Stock Movement

Advertising revenue reached $64.6 billion, slightly above analysts' expectations of $64.5 billion and up from $58.1 billion last year. However, YouTube ad revenue fell short, bringing in $8.66 billion compared to the expected $8.95 billion. Following the earnings report, Alphabet shares fell roughly 3% in premarket trading on Wednesday.

Cloud Business Gains Momentum

Alphabet's cloud business reported revenue of $10.35 billion and an operating income of $1.17 billion, surpassing analyst expectations of $10.1 billion in revenue and $982.2 million in operating income. This performance is a significant improvement from Q2 2023, which saw $8 billion in revenue and $395 million in operating income.

AI Investments and Future Prospects

In Q2, Alphabet spent $2.2 billion on AI model development across its DeepMind and Google Research organizations, up from $1.1 billion in Q2 2023. Despite these investments, generating revenue from AI for Google's Cloud and ad segments remains uncertain. Jefferies analyst Brent Thill noted that substantial AI revenue is more likely a 2025-26 event, as many companies are still in the pilot phase with AI.

Challenges with Generative AI

Google continues to refine its generative AI feature, AI Overview, in Google Search. After launching in May, the feature faced criticism for inaccurate responses, leading Google to scale back some of its functionalities.

Workforce Adjustments

Amidst its AI investments, Alphabet has been reducing its workforce. The company reported having 179,582 employees in Q2, down from 181,798 in the same period last year.