Google doubled its cloud business, yet still fell 9%. The market is asking who will pay the AI bill
Alphabet brought in $127.6 billion in revenue in the third quarter, 25% more than a year ago. Sundar Pichai is boasting that the company is on track for half a trillion dollars in annual revenue. Shares of $GOOG are nevertheless down more than 9% after the market closed, falling from $321.89 to around $289. That wiped roughly $350 billion off its market value in just a few minutes.
Business is booming like never before
Google Cloud is the star. Revenue grew 103% to $30.7 billion, and operating profit tripled from $3.6 billion to $11.1 billion. Cloud is now operating at a margin of around 36%. Search, which skeptics said AI would kill, added 12% to reach $63.4 billion, and the number of queries is growing at its fastest pace in five years. The Gemini app has surpassed one billion users. YouTube was the only weaker performer, growing 9% to $11.2 billion. Overall operating profit rose 30% to $40.6 billion.
So why are the shares falling?
The first reason is earnings per share. The market expected $3.02, while Alphabet reported $2.12. Some of the shortfall came from a one-off $8.7 billion loss on the revaluation of equity investments, which knocked $0.55 off earnings per share. But even excluding that, earnings come to $2.67, still well below estimates. Revenue also came in just short of expectations.
The second, and in my view main, reason is cash. Investments in data centers reached $51.4 billion, more than double last year's $24 billion. Free cash flow therefore came in at negative $9.1 billion. Alphabet did not buy back a single share during the quarter, despite spending $11.5 billion on buybacks in the same period last year. Instead, it borrowed $28.7 billion through bonds and raised another $12.4 billion by selling new shares. Interest expenses jumped significantly, from $143 million to $967 million.
For years, Google was the epitome of a money-making machine that used its cash to pay for everything, including buybacks. Now it is financing the AI race with debt and shareholder dilution.
I really like the price Google has reached; I'm considering increasing my position around $280-290.
Do you hold Google shares in your portfolio? What do you think of the results?