Shares of Alphabet (GOOGL -8.81%) (GOOG -8.94%) turned sharply lower on Wednesday, falling as much as 9.7%. As of 11:44 a.m. ET, the stock was still down 8.9%.
The catalyst that sent the tech giant lower was its third-quarter earnings report, as strong ad revenue was offset by weakness in its cloud computing business.
It’s all about the cloud
Alphabet generated revenue of $76.7 billion, up 11% year over year, as its online advertising business continued the gradual recovery from its downturn-induced slump. The bottom line also got a boost as diluted earnings per share (EPS) of $1.55 jumped 46%. Â
To give some context to the numbers, analysts’ consensus estimates were calling for revenue of $75.9 billion and EPS of $1.45, so Alphabet sailed past both measures by a comfortable margin.Â
Google’s advertising business, which represents the lion’s share of Alphabet’s revenue, grew 9% year over year to $59.6 billion, highlighting the continuing recovery in online ads.
While the news was mostly good, myopic investors focused on a single segment of Alphabet’s business — namely Google Cloud — and did not like what they saw. The cloud segment generated revenue of $8.4 billion, up 22% year over year, marking its slowest rate of growth since early 2021. Analysts’ consensus estimates were calling for cloud growth of $8.6 billion, so investors were left wanting. Â
During the earnings call, CFO Ruth Porat blamed the tepid growth on “customer optimization efforts” — industry parlance for cost-cutting — a continuing refrain in recent quarters, though she didn’t provide any additional context. Wall Street read that as suggesting that its artificial intelligence (AI) cloud offerings had yet to attract a sizable audience. This was in stark contrast to Microsoft, whose cloud growth accelerated during the quarter, driven by strong demand for AI.
Here’s why Alphabet stock is a buy
CEO Sundar Pichai tried to put the best spin on the issue, saying, “We’re continuing to focus on making AI more helpful for everyone; there’s exciting progress and lots more to come.” Given the continued slowing of its cloud business, investors are taking a wait-and-see approach.
It’s still early in the AI revolution and investors should take a longer view. Furthermore, given the company’s domination of search and online advertising, Alphabet stock is a steal at just 22 times forward earnings.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
