Alphabet shares fall after Cloud Unit misses estimates

(Bloomberg) — Alphabet Inc.’s cloud computing unit announced… It reported lower-than-expected profits, raising concerns about the company’s position in a market critical to its future. Alphabet shares fell 6.5% in pre-market trading on Wednesday.

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As Google’s dominant search business matures, investors are looking to the cloud unit to take the lead in growth. The unit reported operating income of $266 million, below estimates of $434 million.

Google has long lagged behind Inc. and Microsoft Corp. In the cloud computing market, companies sell space on their servers and software to enterprise customers. Google Cloud, which reported earnings for the first time earlier this year, has attracted business from AI startups. But its momentum fell short of expectations last quarter, raising some concerns about a widening gap between Google and its competitors.

“Cloud computing is a much more complex business than advertising, and one in which Google faces stiff competition,” said Max Wellens, an analyst at Insider Intelligence. “While its appeal among AI startups may pay off in the long run, it doesn’t currently help Google Cloud enough to satisfy investors.”

The company’s shares fell to $129.80 in early trading before the New York stock exchanges opened on Wednesday, after previously closing at $138.81. Shares are up 57% so far this year.

Alphabet President Ruth Porat said in a press interview that unit sales were affected by cost reductions by some customers. Porat is still serving as the company’s CFO while Alphabet searches for her replacement following her promotion.

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Read more: Microsoft sales estimates top as cloud grows

The results marred an otherwise health report. Alphabet said in a statement on Tuesday that third-quarter sales, excluding partner payments, amounted to $64 billion. Analysts expected $63 billion, according to data compiled by Bloomberg. Net income was $1.55 per share, compared to Wall Street estimates of $1.45 per share.

The company reported $44 billion in search advertising, beating analysts’ average forecast of $43.2 billion.

Porat said in a call with investors after the results that the company was pleased with the growth in its advertising revenues after a period of “historic volatility.”

The search market – dominated by Google – is facing new threats from the emergence of artificial intelligence-generated chatbots. These are programs that answer users’ questions in a more conversational way when prompted. Companies including Microsoft, which supports Open AI Inc.’s ChatGPT, are challenging Google’s leadership in search with the new technology.

The company has raced to weave generative AI technology into its own products, but some in Silicon Valley say the tech giant has been too slow to spot the shift in the market, creating an opening for its rivals.

Porat and Alphabet CEO Sundar Pichai said they will continue to find ways to operate more efficiently, with Porat noting that the company will maintain a “slower pace of headcount growth.” The goal of these efforts is to free up as much room as possible for investment in opportunities such as artificial intelligence.

“We will do whatever it takes to make sure we have the world’s leading AI models and infrastructure, without exception,” Pichai told investors on the phone.

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Evelyn Mitchell Wolf, a senior analyst at Insider Intelligence, said Google’s ongoing trial with the US Department of Justice over its abuse of power in the search market is also weighing on Wall Street’s enthusiasm. “Any outcome should impact investors’ confidence in the longevity of Google’s business model.”

YouTube reported revenue of $8 billion, compared to the average analyst estimate of $7.8 billion. Unity has been a drag on Alphabet’s performance in recent quarters, but results indicated it is benefiting from a broader recovery in digital ad spending.

Alphabet’s other bets — the corporate unit that includes self-driving car efforts Waymo and life sciences unit Verily — generated $297 million in revenue while losing $1.2 billion, in line with analysts’ expectations.

(Updates with pre-market trading from first paragraph)

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