AI, cloud boost Alphabet profits by 34 percent

Alphabet’s profit jumped 34 percent in the third quarter as the parent company of search giant Google reported strong growth in its cloud business amid robust demand for computing and data services used to train and run generative artificial intelligence models.

The solid results released on Tuesday helped alleviate investors’ fears about the financial returns on the vast sums being spent on AI by Alphabet and other Big Tech peers as they seek to dominate the nascent sector. The standout unit was Google Cloud, where revenue increased 35 percent to $11.4 billion and operating profit increased sevenfold to $1.9 billion from $266 million in the same period last year.

Net income was $26.3 billion compared with $19.7 billion in the same period a year earlier, exceeding analysts’ expectations for $22.8 billion. Revenue rose 15 percent to $88.3 billion in the three months through to the end of September, beating the average estimate for $86.3 billion.

“Our long-term focus and investment in AI [is] paying off,” said chief executive Sundar Pichai, citing customer demand for its specialized clusters of chips and the growing popularity of its AI Overviews feature in search. “We continue to invest in state-of-the-art infrastructure to support our AI efforts, from the US to Thailand, to Uruguay.”

However, Google’s cloud business remains a distant third to Microsoft’s Azure and market leader Amazon Web Services, and competition is cut-throat. This week, Microsoft accused Google of running “shadow campaigns” and secretly funding lobby groups to undermine its position with regulators as it tries to poach customers and win market share.

Revenue at Alphabet’s core search and advertising businesses rose 10 percent to $65.9 billion. While the rate of growth slowed slightly, it showed little impact from AI chatbot challengers such as OpenAI’s ChatGPT.

YouTube revenue rose 12 percent to $8.9 billion for the quarter—and Google noted its ads and subscription sales surpassed $50 billion over the past four quarters for the first time as the platform expands into sports such as the National Football League.

“The results show a strong beat across all segments, with notable strength in subscriptions and Cloud,” said Jefferies analyst Brent Thill.

Alphabet shares were up more than 6 percent in pre-market trading on Wednesday. The stock had previously gained 22 percent this year, giving it a market capitalization of $2.1 trillion and making it the fourth most-valuable listed company in the world behind Apple, Nvidia and Microsoft.

Google is the first of Silicon Valley’s tech giants to report earnings this quarter, and investors will be watching to see how much more money they have poured into data centers and advanced chips that power AI—and whether any of those bets are starting to pay off.

Microsoft, Alphabet, Amazon, and Meta all revealed massive increases in capital expenditure in the first six months of 2024—totaling $106 billion—and executives pledged more investment this year and in 2025. The main beneficiary has been Nvidia, which briefly became the most valuable global company on the back of demand for its chips.

Alphabet’s capex rose again to $13.1 billion in the quarter, slightly more than in the prior three months and up 62 percent from the $8.1 billion spent in the same period last year.

Chief Financial Officer Anat Ashkenazi said the majority of that investment went toward infrastructure, which includes servers, chips, data centers, and networking equipment. Google will spend roughly the same amount in the fourth quarter, implying total spend of more than $50 billion this year, with that figure set to rise modestly again in 2025, she added.

While Alphabet has shown strong earnings momentum this year, it faces threats on several fronts. A new generation of AI-powered chatbots such as ChatGPT and Anthropic’s Claude are challenging its core search business. In response, Google has rolled out “AI Overviews” powered by its Gemini models at the top of results pages to provide direct answers to queries, rather than just a list of links.

Pichai said AI Overviews are gaining popularity with customers because of Gemini’s ability to answer complex questions. Adverts are being integrated, and the computing costs of each query have dropped 90 percent in the past 18 months, he added.

Pichai also said Gemini was boosting internal productivity, with more than a quarter of all new code generated by AI, which is then reviewed and accepted by engineers.

More immediately, Google faces the prospect of being broken up after losing a landmark antitrust case brought by the US Department of Justice, which resulted in a ruling that determined its search business had engaged in anti-competitive monopolistic behavior. The company also lost an antitrust case against its Play app store brought by Fortnite developer Epic and faces a trial in a second DoJ case over its ad tech business.

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