Google's revenue grew the fastest in two years in the first quarter, with profits surging 60%, betting on AI's capital expenditure of 12 billion US dollars. The growth of the cloud business accelerated again to a high of 28% at the beginning of last year. Its operating profit soared fourfold, and advertising revenue improved steadily. The company also paid a quarterly dividend for the first time in history, and will repurchase up to $70 billion in additional shares.
After the US stock market on Thursday, April 25, global digital advertising and search giants also made big inroads into AI,$Alphabet-A (GOOGL.US)$Financial results for the first quarter of 2024 have been released.
Due to the accelerated growth of advertising and cloud revenue, all indicators exceeded expectations. Google's stock price once rose more than 16% to a record high after the market. If it remains open on Friday, the market value will surge by about 300 billion US dollars.
Alphabet Class A shares closed down about 2% on Thursday, stopping rising for three days. This year, they have accumulated gains of more than 11%, significantly outperforming market gains and rising 50% over the past 12 months.
Due to optimism about continued strength in the core search business, YouTube advertising, and the cloud sector, Wall Street's consensus rating for Alphabet is a “strong buy”. Among them, 30 analysts suggested “buy,” 7 rated “hold,” and no one recommended “sell.” The average target price is $167.51, which means there is still room for potential growth of 9%.
Google's Q1 revenue growth accelerated to the fastest in two years, with profits surging 60% year over year, betting on AI capital expenditure of 12 billion US dollars
According to financial reports, Google's parent company's total revenue for the first quarter was US$80.54 billion, up 15% year-on-year, the fastest growth rate since the beginning of 2022, and higher than market expectations of US$79.04 billion. Adjusted earnings per share of $1.89, far exceeding expectations of $1.53, surged 61.5% year-on-year from $1.17 in the same period last year. Net profit jumped 57% year over year to US$23.66 billion, higher than the forecast of US$18.95 billion.
Compared with last quarter's revenue of US$86.31 billion, EPS earnings of US$1.64 per share, and net profit of US$20.69 billion, Google's parent company's revenue declined month-on-month. This was in line with market expectations, but profits were unexpectedly boosted, benefiting from the benefits brought by AI.
Overall, Google's revenue index is growing at an accelerated pace. In the third quarter of last year, its total revenue resumed double-digit year-on-year growth for the first time in more than a year. Previously, the increase fell back to a single-digit percentage for four consecutive quarters, mainly due to the weakening of advertisers' spending due to soaring inflation and aggressive interest rate hikes by the Federal Reserve.
Wall Street generally believes that the growing demand for artificial intelligence generated by integrating generative AI into products may continue to boost its cloud business revenue over the next few quarters. Meanwhile, ad revenue led by search and YouTube continues to improve in line with industry trends.
The traffic acquisition cost (TAC) paid by Google to partners during the quarter was US$12.95 billion, exceeding market expectations of US$12.74 billion. This indicator had an impact on profits. However, the operating margin expanded from 25% in the same period last year to 32%, higher than the forecast of 28.6%. In terms of AI investment, which has received much attention, Google's capital expenditure for the quarter was 12 billion US dollars, 1.7 billion US dollars more than expected.
According to the company, researchers have made rapid progress on the big language model Gemini, and capital expenditure has increased, reflecting investment in infrastructure. Google is beginning to deploy AI overviews to major search pages.
CEO Pichay said in a statement that Alphabet's leading position in artificial intelligence research and infrastructure and global product footprint puts the company in an advantageous position in the next wave of artificial intelligence innovation.
The financial report also stated:
“As announced on April 18, we are integrating teams from Google Research and Google DeepMind focused on building artificial intelligence models to further accelerate progress in the field of AI. The AI model development team of the Google Services division, which was previously part of Google Research, will be included in Alphabet-level activities as part of Google DeepMind, which is expected to begin in the second quarter of 2024.”
The growth of the cloud business accelerated again to a high level of around 28% at the beginning of last year, and its operating profit plummeted fourfold
By business, the first quarter revenue of the cloud business, which the market is most concerned about and is regarded as Google's next growth engine, increased 28.4% year-on-year to US$9.57 billion, higher than analysts' expectations of US$9.37 billion. There was an increase of 25.7% to US$9.19 billion in the fourth quarter of last year. The increase for several consecutive quarters doubled compared to overall revenue growth.
This also represents a new acceleration in the year-on-year growth rate of Google Cloud's revenue, making Wall Street happy and effectively driving the stock price to soar after the market. Cloud revenue increased 37.6% year over year in the third quarter of 2022. Growth in the fourth quarter of that year and the first three quarters of 2023 slowed to 32%, 28%, 28%, and 22%, respectively, and accelerated again from the fourth quarter of last year, which helped ease analysts' concerns about stagnant growth.
Meanwhile, the operating profit of the Google Cloud business more than quadrupled from 190 million US dollars in the same period last year to 900 million US dollars, and continues to be on the right track of turning losses into profits, showing that years of investment have finally yielded impressive returns.
Earlier analysts said that Google's cloud business is a key investment area for the company. With the advent of generative artificial intelligence, this business has become more important as more and more companies are turning to public clouds to run heavy workloads.
Google, which ranks third in the cloud computing market share, is still struggling to catch up with rivals Amazon and Microsoft. Google Cloud includes infrastructure and data analysis platforms (GCP, Google Cloud Platform) for enterprise customers, as well as productivity and collaboration tools (Google Workspace), which account for nearly 12% of total revenue, and is still quite different from Microsoft, the leader in the cloud field.
Advertising revenue improved steadily and exceeded expectations across the board, and the scale of revenue burned by innovative businesses narrowed year-on-year
The core advertising business is also the main revenue driver of Google that Wall Street is closely watching. In the first quarter, advertising revenue increased 13% year over year to 61.66 billion US dollars, higher than the forecast of 60.18 billion US dollars, representing accelerated growth starting in 2023.
Among them, advertising revenue from the YouTube video platform increased nearly 21% year over year to US$8.09 billion, higher than the forecast of US$7.72 billion. Google search and other ad revenue increased more than 14% year over year to 46.156 billion US dollars.
These all indicate a steady improvement in its advertising revenue. Google's core advertising business weakened due to the weak economy in 2022 and increased competition from TikTok, but advertising revenue has been improving since it was announced that the business experienced negative growth in the fourth quarter of 2022.
Earlier analysis indicated that generative artificial intelligence can provide more creative and comprehensive answers to simple text queries. If people change the way they find information online as a result, it may have a significant impact on Google's core search and advertising business.
“Other Bets” (Other Bets) used to be Google's technology innovation division, positioning forward-looking product development and venture capital, including autonomous driving startup Waymo, intelligent healthcare Verily, and venture capital funds Google Capital and Google Venture.
This business's revenue in the first quarter increased by nearly 72% year-on-year to US$495 million, higher than the forecast of US$372 million. Operating losses were US$1.02 billion, which was narrower than the loss of over US$1.2 billion in the same period last year, and also better than the loss of US$1.1 billion expected by the market.
In addition, Google Services' quarterly revenue increased 13.6% year over year to US$70.4 billion, outperforming market expectations of US$69 billion. Operating profit increased 28% year over year to close to US$27.9 billion, significantly higher than market expectations of US$24.3 billion.
Alphabet paid a quarterly dividend for the first time in its history, buying back up to $70 billion in additional shares
Another driving factor that drove Google's stock price to a new high after the market was Google's decision to pay a quarterly dividend for the first time.
Alphabet said the board of directors has approved a cash dividend of 20 cents per share to shareholders registered as of June 10 on June 17, and “intends to continue to pay quarterly cash dividends in the future.” The company also authorized an additional $70 billion in share buybacks.
By the end of the first quarter, Alphabet's cash, equivalents, and marketable securities were $108 billion, slightly lower than the same period last year of $110.9 billion. The number of global employees decreased by 5.1% year over year, or 9,800 to about 181,000.
According to some analysts, the number of employees is probably the most important figure in this financial report. “Google (following Meta) also began a year of efficiency. The number of employees decreased by nearly 10,000, and the operating profit margin jumped from 25% to 32%.”
What are you most concerned about?
The future of artificial intelligence is still a key focus of Alphabet's earnings season, especially whether it can drive the accelerated growth of Google Cloud revenue. Analysts will focus on the latest developments in artificial intelligence programs and the Gemini AI model.
The CFRA predicts that Google Cloud's revenue growth rate will remain at least 25% throughout 2024, which will help ease concerns about stagnant growth. Bank of America says strong search revenue will help boost the market's worsening sentiment towards AI.
There are also analysts concerned about Google's profit margins “because the company has failed to cut costs as aggressively as other big tech giants.” Google has also launched Axion, a self-developed artificial intelligence chip specially tailored for data centers, which will increase AI development expenses.
What do you think of Wall Street?
Both the 2024 Paris Olympics and the US presidential election will improve the advertising environment and are widely regarded as the key forces supporting Google's financial reports.
Goldman Sachs said that industry trends indicate strong revenue from the search business this year, and YouTube revenue has also recovered. Jefferies continued to be bullish on Google in the second half of this year “as it saw an improvement in core ad business momentum and increased AI-fueled visibility in 2025.” According to the CFRA, cloud, search, YouTube, and other Google businesses “have incremental opportunities associated with monetizing artificial intelligence.”
However, the intensification of long-term competition in the AI field, even the risk of disrupting Google's core search business, and the tightening of European and American regulations have brought certain challenges. Bernstein said that any mistake made by Alphabet could “sound a wake-up call for artificial intelligence.”
Investment bank Monness Crespi Hardt, which “holds” the stock rating, said he believes Alphabet is in an advantageous position to capitalize on digital advertising trends, establish a long-lasting cloud business, and use artificial intelligence to innovate:
“However, the regulatory environment is not optimistic, competition risks are increasing, Google's internal execution is uneven, and the macroeconomy may be in a quagmire. Perhaps the darkest days are yet to come.”
Jefferies attributed part of the uncertainty to speculations over new share buyback mandates and a new CFO to replace Ruth Porat, who last year said he would step down as CFO and switch to chief investment officer and president.
Last week, Google announced a restructuring of the finance department to invest more resources in the field of artificial intelligence and integrate the artificial intelligence team into Google DeepMind. The company predicted that “the technology industry is in the midst of a huge platform transformation brought about by Al.”
KeyBanc anticipates that as Google pays more attention to product speed and division restructuring in the AI era, layoffs may continue in the second quarter of this year, but this indicates that operating profit will rise further:
“As Alphabet continues to invest in artificial intelligence infrastructure, capital expenditure could reach $42 billion this year and increase further to $46 billion next year.”
According to some analysts, Alphabet experienced some artificial intelligence setbacks at the beginning of this year, and problems with the image generator caused the company to withdraw the tool from the market. Google also laid off dozens of employees, who participated in a series of protests against working conditions and the provision of cloud computing and AI services to the Israeli government and military:
“Additionally, the US Department of Justice's lawsuit against Google's search distribution business and another lawsuit against its online advertising business have also attracted attention, not to mention European legislation aimed at creating a more competitive digital environment, including the Digital Markets Act and the upcoming EU Artificial Intelligence Act.”
Editor/Somer