Alphabet presented its earnings report on Thursday addressing concerns about the growth of its core Google ads business and the company’s ability to turn a profit from its massive investments in artificial intelligence.
For now at least, the company has put Wall Street’s fears to rest.
Alphabet beat analysts’ estimates, reporting a 15% rise in revenue for the quarter, the fastest pace of expansion since early 2022. YouTube ad sales rose 20%, also beating expectations.
Questions swirl about the future of Google’s online ads because its biggest revenue driver remains search, which is under pressure as new productive AI services like OpenAI’s ChatGPT offer consumers new ways to access information.
“We’re very pleased with our ad momentum,” Alphabet Chief Financial Officer Ruth Porat said on Thursday’s earnings call after the report. “Search had broad growth.”
Alphabet shares jumped 12% in extended trading, pushing the company’s market capitalization to $2 trillion. Ahead of the report, the stock was up 12% for the year, ahead of the Nasdaq Composite but trailing some large-cap peers such as After, Nvidia and Amazon.
First-quarter results showed the core advertising industry picking up speed again after a difficult 2022 and 2023, when brands struggled on spending to deal with rising interest rates and inflationary concerns. Growth is split across the digital ad market, with Meta reporting 27% growth for the first quarter, the fastest since 2021 and Break reporting a 21% increase, a level not seen since early 2022.
Alphabet has been on a cost-cutting spree since last year in anticipation of slower ad growth and increased spending on artificial intelligence, where competition has grown rapidly in the past year. The company has also experienced a number of apparent missteps associated with the rushed launch of various AI products.
There were other reasons for skepticism ahead of Alphabet’s earnings report.
Investors flocked to Meta after its first-quarter report on Wednesday, sending the stock down as much as 19% in extended trading. CEO Mark Zuckerberg opened the investor call by saying he plans to spend billions of dollars investing in areas like artificial intelligence and the metaverse, even though Meta relies on advertising for 98% of its revenue.
Like Meta, Alphabet is pouring money into artificial intelligence. But her investments are turning into sales.
Revenue at Google Cloud, which houses much of the company’s AI technology, rose 28% from last year to $9.57 billion, beating previous estimates. Operating income more than quadrupled to $900 million, showing that Google is finally generating significant profits after pouring money into the business for years to keep up with Amazon Web Services and Microsoft Blue.
Last month, Alphabet announced a number of products, including Vertex AI, a code-free console for businesses to build their own AI agents.
“There were a lot of questions last year and, you know, we always felt confident and comfortable that we could improve the user experience,” CEO Sundar Pichai said on Thursday’s earnings call.
Pichai said he has seen “early confirmation” that the company can use AI to expand search capabilities, citing the US and UK launch.
To show how confident the company is in its financial position, Alphabet announced a first-quarter dividend of 20 cents per share and a plan to repurchase an additional $70 billion in stock.
With its first-quarter results in the mirror, Alphabet now has to keep up with heightened expectations, which will only increase as rivals release more productive AI products. The company also only has a few more quarters in which growth will be comparable to some of its weakest results on record.
“We’re in a new cost reality,” Prabhakar Raghavan, a senior vice president who oversees search, said at a recent meeting, urging employees to work more efficiently.
With genetic AI, the company is “spending a ton more on machines,” Raghavan added, saying organic growth is slowing and the number of new devices coming into the world “isn’t what it used to be.”