Google's cloud division in disasters; Microsoft's thrives

Google-parent Alphabet's cloud division posted its weakest growth in nearly three years, leading to a 5.7% decline in its stock value in after-hours trading. This decline is even more striking when juxtaposed with the success of Microsoft's cloud division, which has seen a substantial surge in sales.

Google's dip in share price came in spite of surpassing Wall Street's profit and sales predictions. This underscores investors' expectations for the tech giant to make significant inroads in the realm of artificial intelligence, and for its cloud business to remain competitive against industry titans like Microsoft's Azure and Amazon.com's AWS.

The looming fears of an economic downturn globally have led several businesses to cut back on their expenditure for cloud services, inclusive of high-end AI tools. This has resulted in Google's cloud unit witnessing a slowdown in its revenue growth rate, which decreased to 22.5% in Q3, down from 28% in the preceding quarter.

For Q3, Google Cloud reported a revenue growth of 22.5%, amounting to $8.41 billion. This is the most sluggish growth rate observed since the beginning of 2021. The operating income for this unit stood at $266 million, a marked improvement from last year's operating loss of $440 million. However, this was still short of Wall Street's anticipated revenue of $8.62 billion for cloud computing.

During a conference call on Tuesday, Ruth Porat, the Finance Chief, attributed the Q3 cloud growth rate to "customer optimisation efforts", without delving into specifics.

In stark contrast, Microsoft's Intelligent Cloud division, home to the Azure cloud computing platform, posted a revenue of $24.3 billion. This surpassed analysts' projections of $23.49 billion, as per LSEG data. Moreover, Azure's revenue growth was 29%, overtaking the 26.2% estimate by market research firm Visible Alpha. Consequently, Microsoft shares experienced a 5% hike post-trading hours.

While some sectors like retail and travel have reported robust ad spending, there has been a noticeable contraction in budget allocations in certain areas, impacting Alphabet's primary revenue source.

For Q3, the company recorded an ad revenue of $59.65 billion, a rise from last year's $54.48 billion. Analysts had, on average, forecasted an ad revenue of $59.12 billion. Within this advertising segment, YouTube ads generated a revenue of $7.95 billion, up from the previous year's $7.07 billion.

Alphabet posted a net profit of $19.69 billion for the July-September period, a significant leap from $13.91 billion in the same period the previous year.

The revenue for the quarter ending September 30 was $76.69 billion, surpassing the predicted $75.97 billion, based on LSEG data.

In Q3, Google's capital expenses amounted to $8.06 billion. This was majorly due to investments in its technical infrastructure, with servers being the primary expenditure, closely followed by data centres. This significant uptick in AI computing investments was highlighted by Porat.

Earlier this year, Alphabet made the tough decision to lay off approximately 12,000 employees, equating to around 6% of its global workforce. This move was in response to a shifting economic landscape. Further, in September, the company also reduced its global recruiting team.

It was revealed that the company accounted for severance and associated charges of $2.1 billion over the first three-quarters of the year.