Alphabet Stock Sinks Despite Lofty Earnings

Key takeaways

• Alphabet’s Q3 earnings were better-than-expected than most revenue and profits forecasts
• But cloud computing let the Big Tech giant down, with Microsoft pulling ahead
• Google’s share price fell 9.5% as a result

Thought Alphabet stock might be soaring after a solid earnings report? Think again. All that it took was Google’s cloud computing revenue to fall slightly short of expectations to send the stock price cratering.

From an investor perspective, it’s justified: Microsoft won in cloud computing for the third quarter, which invites questions over whether Google is managing to keep up in artificial intelligence development – and if it can outpace its long-time rival.

Let’s get into the details of what the Alphabet earnings report looked like, just how badly Google is losing market share to Microsoft and what the stock price reaction was.

What happened with Alphabet earnings?

On the face of it, Alphabet’s earnings should have been a beat. For the third quarter, Google saw its revenue grow 11% from the same period last year to $76.69 billion, ahead of the analysts’ estimate of $76 billion.

Earnings per share arrived at $1.55, ahead of analyst predictions, which came in at $1.46. Ad revenue performed well at $59.6 billion, the same as Wall Street predictions, with YouTube ad revenue coming in at $8 billion, slightly higher than analysts’ anticipated $7.8 billion.

“I’m pleased with our financial results and our product momentum this quarter, with AI-driven innovations across Search, YouTube, Cloud, our Pixel devices and more,” CEO Sundar Pichai said in the company’s earnings statement.

The company repurchased $15.8 billion of common stock in the third quarter and for the fourth quarter, consensus estimates are coming in at $84.9 billion with a profit of $1.63 a share for the Big Tech conglomerate.

Google loses market share to Microsoft

But there was one major fly in the ointment: cloud computing. Google Cloud pulled in $8.4 billion worth of revenue for the third quarter, but this fell short of Wall Street’s expectations for $8.6 billion.

Google was clearly prepared for questions on the topic. CFO Ruth Porat stated on the investors’ call that while cloud growth “remained strong across geographies, industries and products,” Google Cloud’s revenue result reflected “the impact of customer optimization efforts.” That’s corporate talk for “our clients are spending less”.

That explanation looks a little ‘meh’ when you look at Microsoft in comparison, who also published their earnings results yesterday. Microsoft’s Azure cloud computing business grew 28% on a constant currency basis for Q3, with revenue rising by 24% to $31.8 billion. That’s well above industry estimates and Microsoft’s own guidance.

Microsoft also disclosed how much artificial intelligence has contributed to its cloud computing division, stating AI accounted for three percentage points of Azure’s overall 28% growth from the same time last year. On the other hand, Google didn’t do the same – and with only 22% growth in comparison, it’s left traders concerned Microsoft is taking away market share in the cloud computing sector.

Google really doesn’t need Microsoft eating into its market share, given the latter’s business is already thriving compared to the former. The biggest player in the cloud computing market is AWS, with around 32% of the market share, with Microsoft in second place at 22%. Google Cloud trails behind in third place with 11%. Both have taken bites from AWS’ dominance – Amazon’s market share was at 34% last year – but Microsoft pulling ahead puts Google in a vulnerable position.

What was the stock market reaction?

It’s fair to say that Google stock tanked due to the earnings report. The Big Tech titan’s share price dropped by 9.5% on Wednesday, in a clear sign that Wall Street demanded more from the company’s cloud computing efforts going forward. It was the worst day the stock has suffered since the start of the pandemic in March 2020.

In contrast, Microsoft’s share price rose by as much as 3.9% during Wednesday trading in response to the better-than-anticipated cloud computing revenue, with the stock eventually closing over 3% higher.

Google stock has risen by 37% since the start of the year, while Microsoft has seen a 39% lift to its share price.

The bottom line

Even though Google’s earnings report surpassed expectations on the face of it, the cloud computing growth was a serious sore point for Wall Street. It didn’t help Google that there was such an easy comparison for investors to make with Microsoft’s earnings report, released on the same day.

The contrast between the two also shows the investment each company is making in AI and how well they’re utilizing the buzzy new tech. While Microsoft is storming ahead and can tangibly demonstrate how AI is adding value to the business, Google has lagged behind – again. Investors will want to see a marked improvement going forward, and Google will likely learn from this moment.