Alphabet's profit estimates fall as its cloud business expands

Google parent Alphabet (GOOG, GOOGL) reported fiscal third-quarter earnings after the bell on Tuesday, beating analysts' estimates on revenue and profit as its cloud business continued to expand and Big Tech's profits with a robust bottom line ushered in.

The search giant reported earnings per share of $2.12 on revenue of $88.27 billion for the quarter ended September 30. This corresponds to an increase in profits and sales of 37% and 15%, respectively, compared to the same period last year.

Analysts expected earnings per share of $1.83 on revenue of $86.44 billion, according to data compiled by Bloomberg.

Alphabet shares rose nearly 6% in after-hours trading on Tuesday.

Advertising revenue topped $65.85 billion, compared with analyst expectations of $65.5 billion and up from $59.65 billion in the year-ago period.

Google CEO Sundar Pichai highlighted the cloud unit's growth in an earnings call on Tuesday, noting that the company's AI portfolio is attracting new customers and leading to bigger deals. Cloud revenue was $11.4 billion, up 35% from the same period last year and exceeding expectations.

“There is real momentum in this business and the overall opportunity is increasing as customers embrace genetic AI,” he said.

The increase in cloud revenue comes as rivals Microsoft (MSFT) and Amazon (AMZN) are also expected to expand their cloud businesses and increase their investments in AI infrastructure.

With the introduction of increasingly sophisticated AI-powered chatbots, Google is also facing competition in its own country. On Monday, Information reported that Meta (META) is developing its own search engine to power its Meta AI chatbot and provide users with conversational answers to their questions and prompts.

How the next generation of answer engines will compete with Google's traditional and AI-powered search remains a key question for the company.

Pichai called the expansion of AI search tools an improvement in the user experience. AI Overviews, Google's search feature that provides concise answers to user queries, now reaches 1 billion users per month, the company announced Monday.

“People are asking longer, more complex questions and exploring a wider range of sites,” Pichai said. “What’s particularly exciting is that this growth is actually increasing over time as people learn that Google can answer more of their questions.”

Similar to traditional search results, users are shown advertisements that Google places next to AI overviews.

Google is the first of the Big Tech platforms to release a report this week. Meta and Microsoft are expected to report quarterly results on Wednesday, followed by Amazon (AMZN) and Apple (AAPL). While all megacorporations have posted gains so far this year, stocks have taken different paths as investors no longer measure their AI spending and the success of their businesses in lockstep.

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