Google parent Alphabet ad revenue sputters, capex up

Workers move a Google logo during the opening of the new Alphabet’s Google Berlin office in Berlin, Germany, Jan 22, 2019. REUTERS/Hannibal Hanschke/File photo

Alphabet disappointed Wall Street on Tuesday as holiday season advertising sales came in below expectations and the company said its spending on data centers to support its artificial intelligence plans would jump this year.

Shares fell 6 percent in after-hours trade.

Alphabet has faced tough competition for ad budgets from other online platforms such as Facebook, Instagram, TikTok and Amazon.com, and economic signals in the U.S. have been mixed.

READ: Google’s ad sales growth accelerated in 3Q, but investors are unimpressed

Ad revenue in the fourth quarter was $65.5 billion, up from $59.0 billion in the year ago quarter but short of the average analyst expectation for $66.1 billion, according to LSEG data.

“Alphabet’s disappointing ad revenue numbers suggest that corporations worldwide are still uncertain about the pace of interest rate cuts from global central banks,” commented Thomas Monteiro, senior analyst at Investing.com.

Google, inventor of foundational technology for today’s AI boom, also faces tough competition from the two players that have captured the business world’s attention, ChatGPT’s creator OpenAI and its financial backer Microsoft.

Cloud revenue

While Google’s cloud revenue growth slightly topped Wall Street targets, boosted by interest in AI, Microsoft’s Azure grew faster.

Rolling out AI and cloud services requires heavy investment in data centers and research. Capital expenditures shot up 45 percent to $11 billion, the highest in years, and Chief Financial Officer Ruth Porat told analysts on a conference call that capex would be notably larger this year compared with 2023.

READ: Google Bard vs. ChatGPT: Which AI Chatbot Is Better?

Google is bringing a powerful suite of models called Gemini to its ChatGPT rival Bard. It struck a deal to invest up to $2 billion in high-profile AI startup Anthropic as it courts customers from larger cloud rivals Microsoft and Amazon, and it is putting Gemini into advertisers’ hands so their dollars keep flowing to Google’s search business.

Still, AI’s advertising boost may remain far off, in a period of concern that geopolitical and economic uncertainty could discourage ad buyers. The U.S. has started probing AI investments including Alphabet’s, Google is gearing up to appeal a major antitrust case it lost, and the company like others in technology has been cutting jobs.

Overall revenue for the quarter ended Dec. 31 stood at $86.3 billion, compared with estimates of $85.3 billion, according to LSEG data.

Fierce competition

Investors have grown more interested in the fortunes of Google Cloud. Last year the division earned its first-ever quarterly profit, but revenue growth slowed as customers streamlined cloud spending.

Microsoft has been a fierce competitor, adding AI to its cloud and productivity suite long embraced by enterprises, while Google has marketed rival tools. OpenAI’s Nov. 2022 launch of ChatGPT ignited a frenzy over generative AI, which can conjure new text and images on command.

READ: Strong ad sales, stable spending wind beneath Big Tech earnings

Alphabet said Google Cloud revenue in the latest quarter was $9.2 billion, while analysts were expecting $8.9 billion. That marked a re-acceleration of cloud revenue growth from the previous quarter to 25.7 percent but was slower than 32 percent growth in the year-ago quarter. Microsoft on Tuesday reported that sales of its cloud product, Azure, grew at 30 percent.

Alphabet CEO Sundar Pichai told analysts that cloud growth was driven in part by generative artificial intelligence.