With Microsoft’s cloud boom, Google parent Alphabet’s cloud division is missing revenue estimates

Oct 24 (Reuters) – Google parent Alphabet’s ( GOOGL.O ) cloud business hit its slowest pace in at least 11 quarters, sending the company’s shares down 5.7 percent after hours, even as sales in the cloud unit Rival Microsoft ( MSFT.O ) prospered.

Google’s share price plunge, despite beating Wall Street estimates for profit and sales, shows how much investors want the company to make gains in artificial intelligence, and shows that the cloud business is up against Microsoft’s more powerful Azure and Amazon.com’s. AWS remains competitive.

Fears of a global economic slowdown have prompted companies to cut spending on cloud services, including expensive artificial intelligence tools, which slowed revenue growth in Google’s cloud unit to 22.5% in the quarter from 28% in the previous quarter. The third month has decreased. .

Google Cloud’s third-quarter revenue rose 22.5 percent to $8.41 billion, the slowest growth since at least the first quarter of 2021. The cloud unit reported operating income of $266 million, compared with an operating loss of $440 million last year. Wall Street had expected cloud computing revenue to reach $8.62 billion.

CFO Ruth Porat said on a conference call Tuesday that third-quarter cloud growth was due to “customer optimization efforts,” without elaborating.

In contrast, revenue at Microsoft’s smart cloud unit, which houses the Azure cloud computing platform, rose to $24.3 billion, compared with analysts’ estimates of $23.49 billion. Azure revenue rose 29 percent, beating market research firm Visible Alpha’s estimate of 26.2 percent growth. Microsoft shares rose 5% after hours.

“Despite Alphabet beating quarterly earnings and revenue estimates, investors were disappointed by the relatively weak performance of its Google cloud platform,” Investing.com senior analyst Jesse Cohen said.

While ad spending has been high in some sectors, such as retail and travel, industry executives and analysts have pointed to a pullback in budgets in some areas, affecting Alphabet’s main source of revenue.

The company posted advertising revenue of $59.65 billion in the third quarter, compared to $54.48 billion a year ago. Analysts on average were expecting $59.12 billion in revenue from its ad business. On the company’s advertising side, YouTube ads reported $7.95 billion in revenue, compared to $7.07 billion last year.

Alphabet reported a net profit of $19.69 billion for July-September. compared to $13.91 billion last year.

Revenue for the quarter ended Sept. 30 came in at $76.69 billion, compared with estimates of $75.97 billion, according to LSEG data.

Google said it spent $8.06 billion on capital expenditures in the third quarter, largely the result of investments in its technical infrastructure. Servers were the biggest component, followed by data centers due to a significant increase in AI computing investments, Porat said.

Alphabet earlier this year laid off roughly 12,000 employees, or about 6 percent of its global workforce, in an effort to cut staff amid “different economic realities.” The company also laid off staff from its global recruiting team in September.

The company disclosed that it took a $2.1 billion write-off on work and related expenses for the first nine months of the year.

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