Alphabet (Nasdaq: GOOGL), the parent company of search engine giant Google, performed well overall in the third quarter, but investors were concerned that Google Cloud's performance did not meet expectations.
On October 24th local time, Google's parent company Alphabet released its financial report for the third quarter of 2023 as of September 30th, 2023. According to the financial report, Alphabet achieved a revenue of $76.693 billion in the third quarter, higher than the market expectation of $75.73 billion, compared to $69.92 billion in the same period last year, a year-on-year increase of 11%; The net profit was 19.689 billion US dollars, compared to 13.910 billion US dollars in the same period last year, a year-on-year increase of 42%; Earnings per share was $1.55, higher than the market expectation of $1.449, compared to $1.06 in the same period last year.
However, due to the lower growth momentum of Google's cloud business than market expectations, Google's stock price fell by more than 6% after hours on the same day.
Google's overall revenue performance in the third quarter. Source: Google Financial Report
Alphabet and Google CEO Sundar Pichai said, "I am pleased with the company's financial results and demonstrated product momentum this quarter. We have innovated based on AI (artificial intelligence) in areas such as search, YouTube, cloud computing, Pixel devices, and more. We will continue to focus on making AI more beneficial to everyone and welcoming more exciting developments
Alphabet and Google's CFO Ruth Porat stated that the company's business is mainly driven by growth from search and YouTube, as well as the momentum of cloud computing.
From a business perspective, in the third quarter, the revenue of Google Search, the company's largest business unit, increased from $39.539 billion in the same period last year to $44.026 billion, a year-on-year increase of 11%; The advertising revenue of its video website YouTube also increased from $7.071 billion to $7.952 billion, a year-on-year increase of 12%. Google's advertising business increased from $54.482 billion last year to $59.647 billion.
Overall, the outstanding advertising business in the second quarter financial report of this year has once again brought surprising revenue growth to Google and YouTube. Pichai also mentioned during the post earnings conference call that YouTube Shorts reached an important milestone of 70 billion daily views in the third quarter, compared to 50 billion views at the beginning of this year.
This seemingly excellent transcript has one disappointing aspect for investors: Google Cloud. In the third quarter, Google Cloud achieved revenue of $8.411 billion, a 22% increase from $6.868 billion in the same period last year, but still lower than the market's expected $8.6 billion. In the first two quarters of this year, Google Cloud's revenue growth was around 28% year-on-year.
Google's revenue was divided into three quarters. Source: Google Financial Report
Although both Pichai and Borat repeatedly guaranteed the future of Google Cloud during conference calls, Google's post market share price was still affected by it.
Jesse Cohen, an analyst at Investing.com, a financial website, said that the significant drop in Google's stock price after the market was due to concerns among investors that Google Cloud's underperformance may lag behind competitors Microsoft's Azure and Amazon's AWS.
Lee Munson, President and CIO of Portfolio Wealth Advisors, an investment company, also stated that if Google wants its stock price to continue to rise, it needs to demonstrate more significant returns from its cloud business, otherwise Google Cloud will always be a "third tier cloud computing platform" in the minds of investors.
However, after the overall decline in technology stocks in 2022, Alphabet's stock price has risen by about 57% since 2023, and the company's total market value is currently $1.76 trillion.
Google also reiterated its investment confidence in generative AI technology through this financial report release. As the use of our new AI services gradually expands, we will continue to increase investment to support our AI work. We will continue to reshape the company's cost base to create capacity for these investments and achieve long-term sustainable financial value, "Pichai said in a conference call
In terms of reshaping costs, Google's financial report mentions significant layoffs starting in January this year, stating that the company paid a total of $2.1 billion in employee severance pay and related expenses within 9 months. Currently, Google has 182381 global employees.
It is worth noting that more than a month ago, the US Department of Justice's antitrust lawsuit against Google officially began. According to the US Department of Justice, Google provides annual updates to mobile phone manufacturers such as Apple and Samsung, as well as AT& Telecom operators such as T and companies such as Firefox have paid over $10 billion to maintain their position as the default search engine for web browsers and mobile devices, stifling market competition. In this financial report and conference call, Google did not mention any information about this antitrust lawsuit.