Alphabet: with ad sales down, Google’s head is in the Cloud

Cloud is a long and exciting journey, says Alphabet boss Sundar Pichai. It is certainly an expensive one. Google’s determination to take market share from rivals Amazon and Microsoft led the unit to report operating losses of nearly $3bn on $26bn of revenues last year. Newfound profits in 2023 do not mean this dynamic has changed for good.

In the first quarter of the year, Google Cloud reported operating profits of $191mn. The company is engaged in cost-cutting. But the change could also be connected to Alphabet’s decision to allocate artificial intelligence-connected research and development costs more broadly. For a unit focused on growth, revenue up 28 per cent is more important anyway.

Alphabet has made a few other flattering tweaks. Extending the expected life of servers has cut depreciation expenses by nearly $1bn for the quarter — an easy win. It is expected to lower expenses by more than $3bn for the fiscal year. That is useful when plans to reduce long-term spending via record job cuts have piled up short-term severance costs.

A downturn in advertising spending has pushed cost-cutting while AI competition has forced Alphabet to redouble its efforts to turn research into services. While the fruits of these changes feed through, expect the company to keep reducing the number of outstanding shares to keep investors onside.

Plans to buy back up to $70bn of shares are equal to more than 5 per cent of outstanding shares. Alphabet’s share price is down 30 per cent from its high point in late 2021, meaning it can buy more for less. The same size plan last year was equal to 4.5 per cent of shares.

Despite two consecutive quarters of lower ad revenue this is not a problem. Alphabet has more than $115bn in cash and marketable securities and less than $14bn in long-term debt. Free cash flow in the last quarter was more than $17bn. Plenty to cover a generous repurchase plan with billions to spare.