Alphabet allays concerns that it lagged in Q1 AI results

Alphabet went into its earnings report on Thursday facing concerns about the growth of its core Google ads business and the company’s ability to generate profits from its massive investments in artificial intelligence.

At least for now, the company has allayed Wall Street’s fears.

Alphabet beat analysts’ forecasts, reporting revenue growth of 15% for the quarter, the fastest pace of expansion since the start of 2022. YouTube ad sales jumped 20%, also beating expectations.

Questions swirl around the future of Google’s online ads, as the biggest revenue driver remains search, which is under pressure as new generative AI services like OpenAI’s ChatGPT offer users new ways to access information.

“We’re very pleased with the momentum of our advertising business,” Alphabet CFO Ruth Porath said on Thursday’s earnings call after the report. “Demand is expanding widely.”

Alphabet shares jumped 12% in extended trading, pushing the company’s market capitalization above $2 trillion. Prior to the report, the stock had risen 12% for the year, outperforming the Nasdaq Composite but lagging some mega-cap rivals such as Meta, Nvidia and Amazon.

First-quarter results showed the core advertising business picking up speed again after a difficult 2022 and 2023, when brands scrambled on spending to deal with rising interest rates and inflation concerns. Growth is widespread across the digital ad market, with Meta reporting 27% Q1 growth, the fastest since 2021, and A click reporting growth of 21%, a level not seen since early 2022.

Alphabet has been looking to cut spending since last year in anticipation of slower ad growth and increased spending on AI, where competition has grown rapidly in the past year. The company has also experienced a series of apparent missteps related to the hasty launch of various AI products.

There were other reasons for skepticism ahead of Alphabet’s earnings report.

Investors turned to Meta after Wednesday’s first-quarter report, sending shares down as much as 19% in extended trading. CEO Mark Zuckerberg opened the call with investors by saying he plans to spend billions of dollars investing in areas like artificial intelligence and the metaverse, even though Meta relies on advertising for 98% of its revenue.

Like Meta, Alphabet is pouring money into AI. But his investments turn into sales.

Revenue at Google Cloud, which houses much of the company’s AI technology, jumped 28% from a year earlier to $9.57 billion, beating estimates. Operating income more than quadrupled to $900 million, indicating that Google is finally generating significant profits after pouring money into the business for years to keep up with Amazon Web Services and Microsoft Azure.

Last month, Alphabet announced a suite of products, including Vertex AI, a code-free console for enterprise companies to build their own AI agents.

“There were a lot of questions last year and, you know, we always felt confident and comfortable that we would be able to improve the consumer experience,” Chief Executive Officer Sundar Pichai said on Thursday’s earnings call.

Pichai said he has seen “early confirmation” that the company can use AI to expand search capabilities, citing deployments in the US and UK. He said the company could both manage costs and monetize AI tools at the same time in the coming quarters.

To show how confident the company is in its financial health, Alphabet announced its first quarterly dividend of 20 cents per share and a plan to buy back an additional $70 billion in shares.

With Q1 results in the rearview mirror, Alphabet now has to deal with heightened expectations that will only increase as rivals roll out more generative AI products. The company also only has a few more quarters in which growth will match some of its weakest results on record.

“We’re in a new price reality,” Prabhakar Raghavan, a senior vice president who oversees search, said at a recent general meeting, urging employees to work more efficiently.

With generative AI, the company is “spending a lot more on machines,” Raghavan added, saying organic growth is slowing and the number of new devices coming into the world “isn’t what it used to be.”