Alphabet Inc. reported revenue and profit from its cloud business that missed analysts’ estimates, raising concerns about the company’s position in a market that is critical to its future growth.
The shares fell as much as 6.8% in late trading.
As Google’s dominant search business matures, investors are looking to Google’s cloud unit to take the lead on growth. The unit reported operating income of $266 million, missing estimates of $434 million. The offering still trails Amazon.com Inc. and Microsoft Corp. in the market.
“Investors were disappointed by the relatively weak performance at its Google cloud platform, which is at risk of falling further behind” competitors’ offerings, Jesse Cohen, a senior analyst at Investing.com, wrote in an email.
Alphabet President Ruth Porat said in a media interview that the cloud unit’s sales had been affected by some customers’ cost-cutting.
The results marred an otherwise healthy report. Third-quarter sales, excluding partner payouts, were $64 billion, Alphabet said in a filing Tuesday. Analysts had predicted $63 billion, according to data compiled by Bloomberg. Net income was $1.55 per share, compared with Wall Street’s $1.45-per-share estimate.
The market for search — which Google dominates — is facing new threats from the rise of generative AI chatbots. Those are programs that answer users’ questions in a more conversational fashion when given a prompt. Companies including Microsoft, which backs Open AI Inc.’s ChatGPT, are challenging Google’s search lead with the new technology.
The company has raced to weave generative AI technology into its own products, but some in Silicon Valley say the tech giant has been too slow to detect the shift in the market, creating an opening for its rivals.
Google’s ongoing trial with the US Department of Justice over the alleged abuse of its search market power is also weighing on Wall Street’s enthusiasm, said Evelyn Mitchell-Wolf, a senior analyst with Insider Intelligence. “Any outcome should influence investor confidence in the longevity of the Google business model.”
The company posted $44 billion in search advertising, beating the average analyst projection for $43.2 billion.
YouTube reported $8 billion in revenue, compared with analysts’ average estimate of $7.8 billion. The unit has been a drag on Alphabet’s performance in recent quarters, but the results indicated that it is benefiting from the broader recovery in digital advertising spending.
Alphabet’s Other Bets — the company’s moonshot unit that includes the self-driving car effort Waymo and the life sciences unit Verily — brought in $297 million in revenue while losing $1.2 billion, in line with analysts’ projections.
The company’s shares fell as low as $129.44 in late trading, after closing at $138.81. The shares have gained 57% so far this year.
(Adds shares in final paragraph)