On Tuesday, July 23, after hours trading in the US stock market, the global digital advertising and search giant made a big move into AI.$Alphabet-A (GOOGL.US)$The financial report for Q2 2024 has been released.

In the quarter, the company's revenue and EPS profits exceeded expectations. The advertising revenue from YouTube was slightly lower than expected, and the growth engine of the cloud business, which received much attention, achieved a quarterly revenue over 10 billion US dollars and a quarterly operating profit over 1 billion US dollars. After-hours stock prices rose 2% and then fell 1%, and then rose again and reached 3% at one point. As of the deadline, the stock price has fallen nearly 2%.

In Q2, Google's revenue and profit growth exceeded expectations, but slowed compared to the previous quarter. Capital expenditures increased from the previous quarter to nearly 13.2 billion US dollars.

In the second quarter, Alphabet's total revenue increased by 13.6% year-on-year to 84.74 billion US dollars, higher than the analyst's expected 84.37 billion US dollars. The adjusted EPS increased by more than 31% year-on-year to $1.89, also beating expectations of $1.85. This also represents a drop in revenue and profit growth compared to the previous quarter. At that time, the parent company of Google's revenue increased by 15% year-on-year to 80.54 billion US dollars, the fastest growth rate in two years since early 2022, and EPS increased by 61.5% year-on-year to $1.89. Net profit soared by 57% to $23.66 billion. The net profit in the second quarter fell slightly to $23.62 billion, an increase of 28.6% year-on-year and better than the expected $22.9 billion.

However, since the total revenue in Q3 2023 increased by double digits compared to the same period last year, Alphabet's revenue has maintained this optimistic high-speed growth for four consecutive quarters. The growth rate has fallen to a single-digit percentage since the second half of 2022, mainly due to weak spending by advertisers due to rising inflation and the Fed's aggressive interest rate hikes.

The TAC Google paid to its partners for traffic acquisition in the quarter was $13.39 billion, lower than the market's expected $13.54 billion, which had an impact on profits. The operating profit margin expanded from 29% in the same period last year to 32%, which was the same as the first quarter. The revenue after deduction of TAC was $71.36 billion, higher than the market's expected $70.7 billion.

In terms of the much-watched cloud business, the market's next growth engine, Q2 revenue increased by 29% year-on-year to $10.35 billion, exceeding the market's expected $10.09 billion, and operating profit tripled to $1.172 billion or increased nearly 200% from the same period last year, respectively. The figures were $8 billion and $395 million. Alphabet executives confirmed in the financial report conference call that cloud revenue was boosted by demand for artificial intelligence (AI). Although Google Cloud is still catching up with the industry's top two market shares of Amazon AWS and Microsoft Azure, the business income in the first quarter increased by 28.4% year-on-year to $9.57 billion and increased by 25.7% in the fourth quarter of last year, with consecutive quarters of doubling the growth rate of revenue.

In terms of the heavily watched AI investment, Google's capital expenditures in the second quarter were $13.186 billion, exceeding the first quarter's $12 billion.

In the first quarter report, the parent company of Google predicted that the quarterly capital expenditure for the entire year would be equal to or greater than the first quarter level. CEO Sundar Pichai said at the time that artificial intelligence will affect "the entire company" and it will not be cheap to execute. Some people expect that Google's total capital expenditures this year may soar to $50 billion, an increase of 56% from last year's $32 billion.

Ruth Porat, Alphabet's Chief Investment Officer and the outgoing CFO, said in a financial report conference call:"We have indeed seen the advantage of Alphabet in artificial intelligence, AI infrastructure, and generative artificial intelligence solutions provided to cloud customers. There is no doubt that customers will seek our help when expanding their capabilities."

"Search business's sustained advantage and the development momentum of cloud business" were praised by Google CEO Sundar Pichai, who claimed that the Waymo self-driving car department has paid for more than 0.05 million people to travel per week. Over 1.5 million developers use Google's large model Gemini tool.

They refused to comment on the company's abandonment of the acquisition of Wiz, and have always explored the diversity of business combinations through the acquisition of other companies.

"Quarterly cloud revenue exceeded $10 billion and quarterly operating profit exceeded $1 billion, but advertising revenue growth slowed. "

"Google CEO Sundar Pichai praised the "sustained advantage of the search business and the momentum of cloud business" and claimed that Waymo's self-driving car department had paid for more than 0.05 million people to travel per week. Over 1.5 million developers use Google's large model Gemini tool."

In terms of business segments, the cloud business, which is considered by the market as Google's next growth engine, saw its Q2 revenue increase by 29% year-on-year to $10.35 billion, higher than the market's expected $10.09 billion. Its operating profit tripled to $1.172 billion or nearly 200% growth compared to the same period last year. It was $8 billion and $395 million respectively.

Although Google Cloud is still catching up with the market's top two in market share, Amazon AWS and Microsoft Azure, the company's executives confirmed in a financial report conference call that cloud revenue was boosted by demand for AI.

Despite the fact that Google Cloud is still catching up with the top two in market share, Amazon AWS and Microsoft Azure, the business income in the first quarter increased by 28.4% year-on-year to $9.57 billion and increased by 25.7% in the fourth quarter of last year, with consecutive quarters of doubling the growth rate of revenue.

The core advertising business is also the main income driver for Google that Wall Street pays close attention to, but its Q2 growth slowed down, and the total revenue increased by 11.2% from the same period last year to $64.62 billion, slightly higher than the market's expected $64.53 billion but lower than the overall advertising revenue growth rate in the first quarter, which had increased by 13% year-on-year to $61.66 billion. Among them, advertising revenue from YouTube video platform increased by 13% year-on-year to $8.66 billion in Q2, lower than the market's expected $8.95 billion. Google's search and other revenue increased nearly 14% year-on-year to $48.51 billion, exceeding the expected $47.65 billion. Google's network revenue dropped year-on-year by more than 5% to $7.44 billion, weaker than the expected $7.87 billion.

In terms of the heavily watched AI investment, Google's capital expenditures in the second quarter were $13.186 billion, exceeding the first quarter's $12 billion.

According to company executives, search has made the greatest contribution to overall revenue growth, with particularly outstanding performance in the retail industry. Earlier analysis showed that due to the weakened economy and intensified competition from TikTok in 2022, Google's core advertising business had weakened, but since the negative growth of the business was announced in Q4 2022, advertising revenue has been steadily improving.

At the same time, Google's second-quarter revenue from subscriptions, platforms, and devices was $9.31 billion, slightly lower than the expected $9.38 billion. Combined with advertising revenue, Google's service revenue increased by 11.5% year-on-year to $73.93 billion, higher than the market's expected $73.58 billion.

In addition, "Other Bets" used to be Google's technology innovation department, positioning forward-looking product development and risk investment, including self-driving start-up Waymo, smart healthcare Verily, venture capital fund Google Capital and Google Ventures, etc.

In Q2, this business's revenue increased by 28% year-on-year to $0.365 billion, weaker than the expected $0.3896 billion, and significantly weaker than the revenue growth of nearly 72% in Q1 this year. Operating losses increased from $0.8 billion in the same period last year to $1.13 billion. Waymo opened its services to all San Francisco users in Q2, marking the second full-scale promotion in the city since Phoenix in 2020.

How does Wall Street look at this?

Jefferies analyst Brent Thill said that the fundamentals are still healthy, advertising spending is steady and similar to Q1 or even better, and Google's paid search growth rate will reach around 15%:

"However, it's too early to expect the benefits of AI, as most companies are still in the pilot phase, and substantial AI revenue is more likely to be realized in 2025-2026."

Wedbush analyst Scott Devitt is also optimistic that the AI Overview feature can create incremental user engagement and may become a driving force for the monetization of search business over time.

Meanwhile, another well-known tech stock analyst at the brokerage, Dan Ives, gave a "shareholding" rating and a higher target price of $205, saying that negative surprises related to capital expenditure are still a risk for Google and all major internet companies, but the possibility of this happening in the Q2 report is relatively low because people have a better understanding of the surge in investment in AI capital intensity and have already adjusted their market expectations.

However, KeyBanc pointed out that Alphabet still faces uncertainties such as the antitrust lawsuit against its advertising technology business by the US Department of Justice, the upcoming US presidential election, and the unknown duration of the AI-related capital expenditure cycle.

At the same time, the Q2 report is Alphabet's last complete quarter before CEO Ruth Porat's transfer to the position of President and Chief Investment Officer of the company, and the last complete quarter before the new CFO Anat Ashkenazi takes office at the end of July. Some analysts expect "efficiency" to be the focus of the conference call and the new CFO may further cut the bloated organizational structure.

In addition, just before the release of the financial report, cybersecurity start-up Wiz had just rejected Google's $23 billion acquisition proposal and continued to pursue an independent IPO listing. Recently, Google also ended its search for customer relationship management software manufacturer HubSpot, making Wall Street inevitable to pay attention to management's comments on M&A dynamics and the latest progress of self-driving technology Waymo during the conference call.

Editor/Somer