•    Alphabet delivers strong Q3 earnings

•    Cloud revenue up 35%

•    AI investments boost Search and Cloud businesses

Strong Financial Performance Driven by AI Investments

Alphabet, Google’s parent company, posted impressive Q3 2023 earnings, exceeding analyst expectations and demonstrating solid growth across core segments. The company reported earnings per share (EPS) of $2.12, well above the forecasted $1.85, and revenue rose to $88.27 billion – 15% higher than the same period last year. Much of this growth stemmed from Alphabet’s strategic focus on artificial intelligence (AI), with Google Cloud revenue the fastest grower in Q3 surging 35% year-over-year to $11.4 billion vs. expectations of 10.9 billion.

Impressive Google Cloud Growth

Alphabet’s Google Cloud business grew substantially, generating $11.35 billion in revenue. This was driven largely by enterprise customers increasing their cloud spending to support AI-powered infrastructure and applications. Analysts estimates for this segment was $10.86 billion, highlighting Google Cloud’s impressive performance.  

Google Cloud’s performance compensated for slower growth in Google’s traditional ad businesses. This revenue diversification is essential as competition in the digital advertising area grows and new entrants, such as Amazon and TikTok, pose challenges to Google’s market dominance.

Growth in Advertising and YouTube Sales

Alphabet’s ad revenue increased by 10% year-over-year, reaching $65.85 billion in Q3, though the growth rate has slightly slowed compared to previous quarters. YouTube’s advertising revenue saw a positive lift, increasing to $8.92 billion. The growth is partly attributed to election-related ad spending in the United States, which has helped stabilize and expand ad revenue.

To enhance ad effectiveness, Google recently integrated ads within AI Overviews – a feature that uses generative AI to summarize and display content concisely in response to search queries. Google’s new AI tools have improved considerably since their early 2023 launch, gaining more favourable reception and bolstering user engagement. With an average of 1 billion monthly users now benefiting from AI-driven search enhancements, Alphabet’s ad products are set to maintain competitive advantage even in a crowded market.

Continued Investment in AI and Infrastructure

Google continues to heavily invest in AI, rolling out features like the Gemini AI chatbot and improving AI-powered search functionalities. The company spent $13 billion in capital expenditures (CapEx) in Q3 2023 – a 62% increase from the previous year – to support its AI and data infrastructure. The new CFO, Anat Ashkenazi, confirmed plans to maintain CapEx at similar levels in Q4, with further increases expected in 2025.

This ongoing investment strengthens Alphabet’s ability to enhance technical infrastructure, including servers and data centres. While high CapEx is typical for Alphabet, investors have responded favourably, recognizing that AI advancements could drive greater operational efficiencies and, in turn, profitability.

Alphabet Faces Ad Market Challenges

Despite strong financials, Alphabet faces increased competition in the ad space and regulatory pressures. The company’s share of U.S. search advertising is anticipated to fall below 50% for the first time in nearly two decades, with Amazon capturing a projected 24% by next year. This shift reflects advertisers’ growing interest in platforms like Amazon, where direct access to ready-to-buy consumers is appealing.

Regulatory pressures also loom large, with Alphabet under scrutiny for its search dominance and data privacy practices. Nonetheless, optimism prevails that Alphabet’s AI-driven ad products and extensive user base – comprising over 2 billion active monthly users across seven product groups – will enable it to adapt and continue growing despite potential market and policy risks.

Alphabet’s AI Strategy Drives Growth

Alphabet’s AI strategy is not only helping retain ad market share but is also enhancing user experience and generating new growth opportunities. For example, Alphabet’s AI Overviews encourage users to explore a broader range of websites, generating more complex queries that may increase ad revenue over time. Additionally, Alphabet’s expansion into AI – enhanced applications across Search, Ads, Google Cloud Platform (GCP), Android, and other product groups has strengthened its competitive position.

While regulatory hurdles exist, Alphabet’s strong Search and Cloud growth, coupled with its efficient cost structure, make it a significant player in the AI era. Alphabet’s continued AI-driven success in terms of user satisfaction, engagement, and revenue generation is likely to support higher share prices.

Alphabet Vows Strong Defence Against DOJ’s Antitrust Actions

The Department of Justice’s (DOJ) antitrust case against Google, part of Alphabet, suggests potential drastic actions, including possibly breaking up the company to curb its dominance in the search market. This case, however, is expected to take years to resolve, providing Alphabet time to prepare its defence. Alphabet has expressed strong opposition to the DOJ’s proposed remedies, which it sees as excessive. Meanwhile, Alphabet’s stock remains relatively affordable compared to other tech giants, and the company’s solid Q3 earnings report has increased its market appeal. Although the outcome of the case is uncertain, any structural changes could significantly impact Google’s revenue.  

Source: TradingView

Technical Analysis

Alphabet has been trading in a strong up trend since November 2022 which remains firmly intact. Wednesday’s price action broke above minor support of $170.44 suggesting that the correction from the July high is likely to be over.  

The Relative Strength Index (RSI) remains in the sideways market range suggesting that the price may continue to consolidate in the near-term before it gathers momentum and trades higher. 

Based on the recent breakout our year end price target is at $193, however levels to $210 are achievable in 2025. 

Conclusion

Alphabet’s Q3 2023 earnings report highlights the company’s robust financial health, driven by its expanding AI portfolio, impressive cloud growth, and resilient ad business. With continued investment in AI infrastructure and a strategic move to diversify revenue streams, Alphabet is well-positioned to face competitive and regulatory challenges.

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