Alphabet, the parent company of Google, experienced a significant drop in its stock price on Wednesday after the revenue generated by its Google Cloud unit fell short of analyst expectations. This decline marked the largest decrease in Alphabet shares in a year, with the stock plummeting close to 9% during mid-day trading, reaching a price of $126.51. Notably, this steep drop comes despite Alphabet surpassing Wall Street’s predictions for both revenue and earnings per share.
While Alphabet’s overall results impressed, the underperformance of its cloud division stood in stark contrast to its industry competitor, Microsoft. The earnings report from Microsoft demonstrated accelerated growth in their Intelligent Cloud business. In contrast, Google’s cloud revenue reached $8.41 billion, falling short of Street Account estimates of $8.64 billion.
The disappointing showing by Google Cloud created concerns among analysts, particularly when compared to the robust growth reported by Microsoft’s Azure platform. UBS analysts voiced their disappointment with Google Cloud’s commentary on optimization, as they had anticipated more positive momentum and a move away from optimization efforts. KeyBanc analysts also noted that limited disclosures from Google are raising worries that Google lost market share to Microsoft Azure, which posted a growth acceleration of 28% year-over-year.
During the investor call, Alphabet’s Chief Financial Officer Ruth Porat acknowledged the continued strong growth of the company’s cloud division across various geographies, industries, and product lines. However, she mentioned that the expansion rate reflects the impact of customer optimization efforts, which indicates clients reducing their spending on cloud services. These comments seemed to unsettle UBS analysts, who were expecting cloud players to show progress in overcoming optimization challenges.
Jefferies analysts also expressed concern about the slower growth rate of Google Cloud, which expanded by 22% compared to the 28% growth reported in the previous quarter. They attributed this deceleration to the industry’s struggle in scaling up artificial intelligence infrastructure, which affects recognized revenue. Despite the high interest in generative artificial intelligence, the slow ramp-up of AI infrastructure may impact the pace of revenue growth in the cloud sector.
Alphabet’s disappointing performance in its Google Cloud unit has had a significant impact on the company’s stock price. While it surpassed expectations in overall revenue and earnings per share, the underperformance of Google Cloud, particularly compared to Microsoft’s Azure platform, has raised concerns among analysts. The impact of customer optimization efforts and slower growth in the cloud sector have further exacerbated these worries. As Alphabet moves forward, it may need to address these challenges and regain investor confidence in its cloud division’s ability to compete effectively in the market.
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