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June 24, 2024

Alphabet Stock Plunges After AI and Cloud Revenue Falls Short of High Expectations

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Jan 31, 2024

Alphabet Inc., the parent company of Google and other technology businesses, reported mixed fourth-quarter financial results after the market close on Tuesday, January 31st, 2024. While overall revenue and earnings exceeded analyst estimates, sales growth slowed from recent quarters and disappointed optimistic projections. In particular, revenue from Google’s artificial intelligence and cloud computing divisions came up short versus extremely lofty growth assumptions. This news sent Alphabet’s share price tumbling over 6% in after-hours trading despite the fact that core advertising revenue remained strong.

AI and Cloud Growth Decelerates Causing Stock Slide

The main culprit behind the dramatic stock drop was decelerating revenue expansion rates in two key areas – Google Cloud and AI-enabled offerings.

Google has invested heavily in its cloud infrastructure and artificial intelligence capabilities in recent years with the aim of diversifying revenue away from the advertising business. However, growth is slowing from the breakneck pace achieved during the pandemic.

Division Q4 Revenue Growth (YOY)
Google Cloud $7.32 billion 32%
AI-enabled revenue $3.19 billion 11%

While objectively these growth rates remain high, they failed to match Wall Street’s increasingly optimistic projections. In particular, Google Cloud revenue missed estimates by over $400 million.

This disappointment, coupled with concerns over a weakening global macro economy, triggered an intense wave of selling in after-hours trading. Alphabet’s share price quickly shed over 6%, wiping out nearly $100 billion in market capitalization. The tech-heavy Nasdaq index also sank over 1% due to fears that economic conditions could slow digital ad spending.

However, some analysts cautioned investors not to overreact to one quarter’s results. “Google’s AI and cloud results weren’t stellar but they weren’t awful either,” noted tech analyst Dan Ives of Wedbush Securities. “This is more a situation where super-lofty expectations got ahead of reality.”

Core Advertising Holds Up Despite Economic Worries

Stepping back from the AI and cloud troubles, Alphabet’s core advertising business showed resilience amidst global economic uncertainty. Total quarterly revenue grew 1% year-over-year to $76.05 billion, surpassing analyst forecasts. Advertising still comprises over 80% of Google’s sales.

In particular, advertising revenues from the company’s massive YouTube video platform expanded by nearly 20% from a year ago. This indicates that marketers are still devoting budgets to Alphabet’s unmatched digital video reach even with inflation squeezing consumers.

Additionally, operating margins expanded to 29% versus 26% a year ago thanks to AI initiatives enhancing efficiency. This flow through to higher profitability partially offset revenue shortfalls.

Alphabet CEO Sundar Pichai emphasized that the technology giant continues investing to drive long-term growth while delivering shareholders value today:

“We’re focused on both investing responsibly for the long term and being responsive to the economic environment… I am pleased with our quarterly performance, with revenues of $76 billion, up 1% versus last year, and healthy ongoing revenue growth in Search and Cloud.”

Given macro headwinds, the overall stability shown across Google’s advertising empire during a traditionally slow holiday quarter bodes well. If economic activity improves later this year, revenue growth stands to re-accelerate.

Focus Shifts to Fed’s Rate Decision amid Earnings Season

Beyond Alphabet’s results, attention now turns to the culminating event of a jam-packed week – the Federal Reserve’s latest policy decision slated for Wednesday afternoon. Investors are laser-focused on clues regarding potential interest rate cuts later in 2024 as inflation shows signs of easing. Markets have fully priced in a 25 basis point hike at this meeting.

The Fed’s statement will be even more closely parsed given this week’s torrent of influential Big Tech earnings and mounting recession fears. In addition to Alphabet, both Microsoft and AMD saw their stock prices punished after AI and cloud sales undershot forecasts. Apple and Meta Platforms also report results this week amidst a dismal start to 2023 for the tech sector at large.

With sentiment souring, the Nasdaq index has dropped over 8% year-to-date coming into Wednesday’s trading. Uncertainty prevails heading into the Fed’s high-stakes verdict on the faltering economy alongside volatile tech earnings.

Outlook Remains Strong Despite Near-Term Caution

In the wake of Alphabet’s post-earnings selloff, analysts preach patience. The company remains a “Top Pick” for many experts given ongoing investments powering potential growth in areas like AI, cloud infrastructure, autonomous vehicles, and more.

Advertising still fuels the bottom line today. Search advertising has proven highly resilient to past downturns. YouTube watch time recently hit all-time highs. And Google’s dominant market share leaves competitors far behind.

Short-term volatility aside, analysts see shares recovering in tandem with an eventual macro rebound. According to Bank of America’s Justin Post, “We would be buyers on weakness as estimates likely trough in 2023.”

Of course risks abound, ranging from regulatory threats to further slowdowns in AI and cloud. But Alphabet retains enviable financial strength to navigate uncertainty. The company ended 2022 with over $100 billion in cash reserves -dry powder to deploy across acquisitions and internal projects.

For long-term investors, Alphabet remains well-positioned to capitalize on key technology waves transforming society this decade. Meanwhile, advertisers have little choice but to devote marketing dollars influencing Google’s billions of daily users.

Q4 results proved disappointing to optimistic forecasts but hardly disastrous. Alphabet’s unparalleled innovation engine continues full speed on multi-year growth levers. Once fear fades from frothy markets, the search giant likely reclaims its trillion dollar valuation on the path to fresh highs.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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