Alphabet’s Pricey AI Bet Pays Off With Growth In Cloud, Search

Google parent Alphabet Inc. showed on Tuesday that an expensive foray into artificial intelligence is starting to pay off, delivering better-than-expected traction for its cloud computing business and driving more usage for its flagship search engine.

Reporting healthy gains in both revenue and profit, Google did much to allay Wall Street concerns that the company has squandered an early lead in AI, and that its heavy investments to catch the likes of Microsoft Corp. and OpenAI might not yield dividends. Revenue, excluding partner payouts, increased to $74.6 billion, up about 16% from the year-ago quarter and surpassing the $72.9 billion analysts predicted on average, according to data compiled by Bloomberg. Net income was $2.12 per share, the company said Tuesday in a statement, compared with estimates of $1.84 per share.

As its main search business matures, Google is betting on growth from its cloud division, which supplies computing power, software and services to other companies. Google is drawing more cloud customers using its AI expertise to gain ground on larger rivals Amazon.com Inc. and Microsoft, making inroads by signing on fast-growing AI startups — some of which were founded by former Googlers — as clients.

“In cloud, our AI solutions are helping drive deeper product adoption with existing customers, attract new customers and win larger deals,” Alphabet Chief Executive Officer Sundar Pichai said in the statement.

Alphabet shares rose more than 5% in extended trading following the report. The stock has gained 21% this year.

Sales in the cloud division jumped to $11.4 billion, a 35% rise from the year-ago period and better than analysts had projected. Google is third in the market, but there is room for it to grow alongside Amazon and Microsoft, Ido Caspi, a research analyst at Global X ETFs, wrote in an email. “Increasing enterprise AI workloads will continue to bolster cloud revenues,” Caspi said.

Google is making progress in addressing investor concerns about the billions it spends on AI infrastructure and research. Pichai said on a conference call with investors after the report that Google reduced the cost of producing AI answers in search queries by over 90% in 18 months, “through hardware, engineering, and technical breakthroughs,” while doubling the size of Gemini, the generative artificial intelligence model powering the answers.

The company is also investing heavily in new forms of power, including nuclear, to handle the future load of AI’s progress, Pichai said. And it’s leaning on the technology to help it work more efficiently: More than a quarter of Alphabet’s new computer code is written by AI, Pichai said.

Alphabet’s Other Bets, an eclectic collection of nascent businesses including the self-driving car effort Waymo and the life sciences unit Verily, reported $388 million in revenue, up from $297 million in the year-ago quarter. Waymo, which Alphabet has poured money into for more than a decade, has been rapidly expanding the number of rides it offers in cities like San Francisco and Phoenix. The company said last week it had raised $5.6 billion in its largest-ever funding round.

The Other Bets division remains unprofitable, losing $1.1 billion in the quarter, but Alphabet has been working to narrow those losses. Ruth Porat, Alphabet’s former longtime CFO who famously instilled a greater spirit of fiscal discipline in the company, recently transitioned into a new role as president and chief investment officer. She is expected to focus more on overseeing the company’s Other Bets portfolio.

While Google builds its prominence in the AI industry, the US government is evaluating its major successes — search and digital advertising — for antitrust harm. In August, a US judge declared Google’s search business an illegal monopoly. The Justice Department and a group of states also allege that Google has monopolized the market for advertising technology tools used by websites and advertisers to buy and sell online display ads.

On the earnings call with investors, Pichai warned that the US government’s resolution of the antitrust cases could have “unintended consequences” for US leadership in tech.

Either way, “it’s very clear that Google can perform even in the midst of serious regulatory threats to its ads business,” said Evelyn Mitchell-Wolf, digital advertising and media analyst at Emarketer.

In her first earnings call with the company, Alphabet Chief Financial Officer Anat Ashkenazi, who joined earlier this year, said she expects Google’s capital expenditures to increase considerably next year.