Google Cloud reports slow revenue growth amid the Microsoft cloud boom

Google’s cloud business has slid to its lowest quarterly numbers in the past three years. The company’s stock fell by 5.7% on Wednesday, 25 October, 2023. Contrary to this, Microsoft’s cloud division has seen an exponential surge in numbers.

Although Wall Street had projected good numbers for Google, the drop in share prices indicates the market and investors' expectations from the company to make giant strides in the artificial intelligence market. The cloud division is still competing against more powerful entities, such as Azure from Microsoft and AWS from Amazon.com.

There has been a fear of a global economic slowdown, and hence, many companies are avoiding spending on cloud-based services. This includes expensive AI tools, which has slowed the revenue growth of Google’s cloud division to 22.5% in the third quarter from 28% in the previous quarter.

Google Cloud had a revenue growth of 22.5%, amounting to $8.41 billion, which is the slowest it has recorded since at least the first quarter of 2021. The cloud unit has also reported an operating income of $266 million, with an operating loss of $440 million in the previous year.

Wall Street had predicted that Google's cloud division revenue would amount to $8.62 billion.

During a conference call on Tuesday, 24 October, 2023, Alphabet's finance chief, Ruth Porat, attributed the third-quarter cloud growth to "customer optimization efforts," but did not provide further details. In contrast, Microsoft's Intelligent Cloud unit, home to the Azure cloud computing platform, saw revenue rise to $24.3 billion, surpassing analysts' estimated $23.49 billion, according to LSEG data. Azure revenue experienced a 29% increase, surpassing the 26.2% growth estimate from market research firm Visible Alpha. As a result, Microsoft's shares surged by 5% after hours.

Despite Alphabet surpassing quarterly earnings and revenue expectations, investors expressed disappointment with the relatively weak performance of its Google cloud platform. This underperformance raised concerns about Google Cloud falling further behind competitors such as Azure and AWS. While advertising spending remained robust in sectors like retail and travel, there were budget cutbacks in some areas, impacting Alphabet's primary revenue source. The company reported ad revenue of $59.65 billion in the third quarter, compared to $54.48 billion in 2022, exceeding the average analyst expectation of $59.12 billion in advertising revenue. In the advertising segment, YouTube ads generated $7.95 billion in revenue, up from $7.07 billion in 2022.

Alphabet reported a net profit of $19.69 billion for the July–September period, a substantial increase from $13.91 billion in the previous year. Revenue for the quarter ending on September 30 amounted to $76.69 billion, surpassing estimates of $75.97 billion, according to LSEG data. Google disclosed that it spent $8.06 billion on capital expenses in the third quarter, primarily attributed to investments in its technical infrastructure. The largest expenses were for servers, followed by data centers, reflecting significant investments in AI computing, as stated by Ruth Porat.

Alphabet had initiated cost-cutting measures earlier in the year, laying off over 12,000 employees, which accounted for approximately 6% of its global workforce, in response to changing economic conditions. Additionally, the company conducted layoffs within its global recruiting team in September 2023. In total, Alphabet reported severance and associated charges of $2.1 billion for the first nine months of the year.