Google Sales Rise Despite Expensive AI Push

Fri Apr 26 2024
Ramesh Sridharan (919 articles)
Google Sales Rise Despite Expensive AI Push

Alphabet, the parent company of Google, reported a significant increase in quarterly profit, exceeding 50%. Additionally, the company declared its inaugural cash dividend. As a result, the stock experienced a substantial surge in value, which comes after a period of intense examination regarding the costly investment in artificial intelligence.

Alphabet, the parent firm, recorded a 15% increase in sales for the first quarter of the year, reaching $80.5 billion compared to the same period last year. This was an increase from the 13.5% growth observed in the preceding quarter. In the latest quarter, the company emphasized the implementation of cost controls, which resulted in an improvement in profit margins.

Major technology corporations like Google and Microsoft, who have also shown impressive quarterly sales increases, are investing significant funds in the construction of new data centers and the development of artificial intelligence processors.

Alphabet’s capital expenditures in the first quarter amounted to $12 billion, marking a significant 91% surge compared to the corresponding time in the previous year. Chief Financial Officer Ruth Porat stated that investors can anticipate quarterly capital expenditure to be approximately at or higher than this level.

The parent company of Google also reported strong profits, with a significant increase in net income of 57% to $23.7 billion in the quarter. Following the release of the results and the declaration of a 20-cent dividend, share prices experienced a significant increase, surging by almost 12% during after-hours trading on Thursday. The revenue generated from advertising sales in the first quarter increased by 13% compared to the same period last year, reaching a total of $61.7 billion. Google’s cloud division experienced a significant increase in sales, with a growth rate of about 29%, resulting in a total revenue of $9.6 billion.

Continued reductions in costs contributed to the increase in profits. CEO Sundar Pichai and CFO Porat implemented further job reductions this month in the real estate and finance departments, in addition to a series of cuts that Pichai stated would persist throughout the year.

On Thursday, a representative from Google confirmed that the company had implemented further workforce reductions in the core engineering department, resulting in around 200 individuals being laid off. The spokesperson stated that staff would have the opportunity to submit applications for available positions throughout Google.

Investors are keenly monitoring the tech titans to determine if and how they are benefiting from their investments in AI systems that have the ability to produce text and images. Google has consistently received inquiries on its capacity to safeguard its business model, which mainly relies on search advertisements, as an increasing number of individuals are resorting to chatbots for information.

Google has provided little details regarding the impact of AI on its sales and profits. During a conference call on Thursday, several analysts inquired Pichai about additional information regarding the impact of AI on Google’s financial performance.

Pichai stated on Thursday that the company is optimistic about the rise in search usage among those experimenting with its new AI capabilities. However, he did not offer much information regarding the specific financial impact of this technology.

The proliferation of generative AI technology, such as ChatGPT, has experienced a rapid growth, resulting in an increased need for high-performance chips capable of handling the computational requirements of these applications. The Wall Street Journal visited Amazon’s chip laboratory to observe the functionality of these chips and understand why technology giants consider them to be the future. Illustration by John McColgan

Investors expressed concerns about the expenses associated with AI when Meta Platforms informed them on Wednesday that they could anticipate a minimum of $5 billion in new capital expenditures this year. As a result, the shares of the owner of Facebook experienced a decline of nearly 10% in Thursday’s trade, despite Meta’s report of record-breaking revenue growth in the first quarter that surpassed the expectations of Wall Street.

Mark Zuckerberg, the CEO of Meta, stated on Wednesday that he anticipates the company’s AI services to remain unprofitable for several years.

Over the past 18 months, Google has been engaged in a competitive struggle with Microsoft and its partner, OpenAI, the firm responsible for ChatGPT, in the field of artificial intelligence. The companies have introduced rival offerings targeting businesses to purchase AI-powered functionalities that assist in tasks such as computer code generation.

The competition in the battle has intensified because to the increasing presence of both established corporations and startups launching their own AI models that carry out comparable jobs.

Google originally displayed a lack of agility in its response to OpenAI, and more recently mishandled the introduction of image-generation capabilities in its Gemini chatbot.

However, the value of Alphabet shares has rebounded after experiencing a temporary decline as a result of that incident. The stock has experienced a year-to-date increase of almost 12% up until the close of trading on Thursday, surpassing the performance of the technology-focused Nasdaq Composite Index.

Pichai has implemented various restructurings of Google’s operations in an effort to enhance its efficiency in deploying AI capabilities. This month, he implemented a restructuring of the company’s hardware and research departments, a move he claimed would expedite progress in the field of artificial intelligence. Recently, Google centralized its search team under the leadership of vice president Liz Reid, who has been responsible for implementing new artificial intelligence (AI) functionalities in the company’s main product.

“There were numerous inquiries last year if one were to take a more distant perspective.” Pichai expressed his assurance and ease in enhancing the user experience on the call on Thursday. “There were concerns about the potential expenses associated with handling these tasks, but we are extremely confident in our ability to effectively manage the costs of addressing these inquiries.”

Google’s primary search engine experienced a notable increase in ad sales, expanding at the most rapid rate in over a year.

Google’s primary enterprise has experienced a positive impact due to a significant increase in advertising expenditures from Temu and other Chinese e-commerce firms. According to The Wall Street Journal, the shop ranked among Google’s top five marketers in terms of expenditure last year.

YouTube experienced a significant annual increase in advertising growth, with a spike of 21%. The video platform generated $8.1 billion from sales of advertisements. During recent earnings calls, Google management have placed greater emphasis on the expanding subscription business of YouTube.

Alphabet has announced its intention to maintain the practice of distributing cash dividends on a quarterly basis, pending approval from the board of directors. The board has approved $70 billion in additional stock repurchases, which is equivalent to the amount authorized last year.

Ramesh Sridharan

Ramesh Sridharan

Ramesh Sridharan is our Stock Market Correspondent covering events and daily movements of stock markets in Asia. He is based in Mumbai