Alphabet’s advertising growth falls short of Wall Street expectations

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Alphabet narrowly missed forecasts for growth in its advertising business, sending its shares down as much as 5.5 per cent in after-hours trading and overshadowing a strong final quarter of the year.

Advertising revenue for the fourth quarter of 2023 grew 11 per cent to $65.5bn, the technology giant said on Tuesday, slightly below analysts’ $66bn consensus forecast. Ad revenue on YouTube, which hit 70bn daily views, grew almost 20 per cent to $9.2bn.

Ad revenue accounts for almost 80 per cent of Alphabet’s top line. The business has returned to growth in the past three quarters as business confidence has improved following clearer signals from the Federal Reserve that interest rates have peaked and could be cut as soon as March.

In other divisions, Alphabet reported a strong final quarter of 2023. Overall revenue rose to $86.3bn, a 13.5 per cent increase, and ahead of analyst expectations for $85.3bn.

The performance was boosted by faster than expected growth in Alphabet’s Google Cloud services business, which reported revenue of $9.2bn, a 26 per cent rise from the same period last year.

Capital expenditure rose 45 per cent to $11bn in the fourth quarter and Alphabet said spending would be “notably larger” in 2024 as it invests in servers, data centres and other technical infrastructure to build its artificial intelligence offering, particularly in its advertising and cloud services businesses.

Google will roll out Gemini Ultra later this year, the most advanced upgrade to its generative AI chatbot, Bard. It has continued to shift to AI-driven ad formats, which are intended to improve its advertising customers’ return on investment. Google also began integrating its Google Brain and DeepMind teams in April to accelerate its progress in AI.

Sundar Pichai, Alphabet’s chief executive, said: “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.”

Google Cloud will be a crucial growth driver for Alphabet amid rising demand for generative AI. Its strong fourth-quarter performance marked a turnaround from the previous quarter, when the division missed revenue targets.

The group reported post-tax income of $20.7bn for the quarter, up 50 per cent year on year. Earnings per share rose to $1.64 from $1.55 in the previous quarter, signalling three straight quarters of EPS growth. Full-year revenues were $307bn, up 22 per cent, while net income was $73.8bn, up 23 per cent.

Alphabet shares hit record highs this month amid a broader surge in tech stocks. But investors are watching for signs that Google can narrow the gap with Microsoft to develop commercial generative AI models and integrate the technology into its Cloud services and search products, which compete with AI-advancements by Microsoft’s Copilot.

Pichai said Google was also “experimenting” with applying its Gemini generative AI to its Search business. “AI gives us an opportunity on the organic side and the monetisation side and we are in the early days of it,” he said. “Taking the long-term view we will be able to service information needs in a deeper way and I am pretty excited about what’s ahead.”

Microsoft has stormed ahead of its Big Tech peers in the generative AI arms race, investing $13bn into ChatGPT-maker OpenAI last year and overtaking Apple as the world’s largest company by market capitalisation this month.

Google laid off 12,000 employees at the start of last year, about 6 per cent of Alphabet’s workforce. There have been hundreds more lay-offs so far this year and warnings from management to expect further cuts, as Google looks to reverse a pandemic hiring spree, curb spending and reorient resources towards development of AI systems. 

Alphabet said on Tuesday that it recorded $2.1bn of employee severance charges in 2023. It also said it had incurred $3bn of exit charges related to reducing its office space during the year.