Google's Q2 revenue and profit growth exceeded expectations, with quarterly cloud revenue surpassing $10 billion for the first time, but advertising slowed down, leading to a post-market shake and decline | Financial Report Insights

On Tuesday, July 23, after the U.S. stock market closed, Alphabet, the global digital advertising and search giant, made a major move into AI and released its second-quarter financial report for 2024.

The company's revenue and EPS profits for the quarter both exceeded expectations. While advertising revenue from YouTube fell slightly below expectations, the cloud business, a highly anticipated growth engine, achieved its first quarter with revenue exceeding $10 billion and quarterly operating profit exceeding $1 billion. After-hours trading saw the stock price fluctuate significantly, initially rising by 2% before briefly dropping by 1%, then rising again by 3% at one point, but ultimately closing down by over 1.6%.

Before the financial report was released, Google's Class A shares rose by 1% and closed with a slight increase. Year-to-date, the stock has risen by over 30%, outperforming competitors Microsoft and Amazon, as well as significantly outpacing the S&P 500 index, which rose by over 16%, and the Nasdaq, which rose by 20% during the same period. Since the positive first-quarter report, Google's Class A shares have risen by over 16%. Starting in June, the company began issuing its first-ever dividend of 20 cents per share and implemented a $70 billion stock buyback program.

Due to continued optimism about the core search business, YouTube advertising, and the strong performance in the cloud sector with the assistance of AI, Wall Street's consensus rating for Alphabet remains "strong buy." Out of 33 analysts, 6 recommend "hold," and no one is recommending "sell." The average target price has risen to $202.88, representing a potential upside of 11%.

Some analysts point out that Google's price-to-earnings (P/E) ratio, relative to the expected earnings in 2025, is 21 times, which is still attractive compared to other "Tech Seven Sisters." Wedbush Securities stated, "Considering the strong performance of the underlying digital advertising market and the improvement in the monetization capabilities of artificial intelligence, Google's advertising and cloud computing businesses will continue to benefit. We believe that the current valuation is not high."

Q2 Google's Revenue and Profit Growth Exceed Expectations, but Slows Down Compared to the Previous Quarter, Capital Expenditure Increases to Nearly $13.2 Billion on a Quarter-over-Quarter Basis

In the second quarter, Alphabet's total revenue increased by 13.6% year-over-year to $847.4 billion, up from $746 billion in the same period last year, surpassing analysts' expectations of $843.7 billion. Adjusted earnings per share increased by over 31% year-over-year to $1.89, also higher than the expected $1.84.

This also means that both revenue and profit growth have slowed down compared to the previous quarter. At that time, Google's parent company saw revenue increase by 15% year-over-year to $805.4 billion, the fastest growth rate in two years since the beginning of 2022, with EPS soaring by 61.5% year-over-year to $1.89 and net profit jumping by 57% to $23.66 billion. However, in the second quarter, net profit slightly decreased to $23.62 billion on a quarter-over-quarter basis, with a 28.6% year-over-year increase and better than the expected $23 billion.

Nevertheless, since the third quarter of 2023, when its total revenue saw double-digit year-over-year growth for the first time in over a year, Alphabet has maintained this optimistic high-speed growth for four consecutive quarters. Starting from the second half of 2022, the growth rate had declined to single-digit percentages for four consecutive quarters, mainly due to weakening spending by advertisers due to soaring inflation and the Federal Reserve's aggressive rate hikesGoogle's Traffic Acquisition Costs (TAC) paid to partners in the quarter amounted to $13.39 billion, lower than the market's expected $13.54 billion, impacting profits. Operating profit margin expanded from 29% in the same period last year to 32%, remaining flat from the first quarter. Revenue, excluding TAC, reached $71.36 billion, higher than the market's expected $70.7 billion.

In the highly anticipated AI investment sector, Google's capital expenditure in the second quarter was $13.186 billion, exceeding the $12 billion in the first quarter.

During the first quarter report, Google's parent company predicted that the quarterly capital expenditure for the entire year would be equal to or greater than the first quarter level. CEO Sundar Pichai stated that artificial intelligence would impact the "entire company" and come at a high cost. Some expect Google's total capital expenditure this year to reach as high as $50 billion, a 56% increase from last year's $32 billion.

Alphabet's Chief Investment Officer and soon-to-be former CFO, Ruth Porat, stated in the earnings call:

"We have indeed seen Alphabet's advantages in artificial intelligence, AI infrastructure, and generative AI solutions for cloud customers. Without a doubt, customers seek our help in expanding their capabilities.

Declining to comment on the company's decision to abandon the acquisition of Wiz, we have always explored the 'diversity' of our business portfolio through acquiring other companies."

Quarterly cloud revenue surpasses $10 billion and operating profit exceeds $1 billion for the first time, but ad revenue growth slows down

CEO Sundar Pichai praised the "continued strength of the search business and the momentum of the cloud business," stating that Waymo's autonomous driving car division sees 50,000 paid trips per week. Over 1.5 million developers use Google's large-scale model tool, Gemini.

By business segment, the cloud business, which is seen as Google's next growth engine and is most closely watched by the market, saw second-quarter revenue grow by 29% year-on-year to $10.35 billion, surpassing the market's expected $10.09 billion, with operating profit tripling to $1.172 billion or nearly 200%, compared to $8 billion and $395 million in the same period last year, respectively.

This marks the first time Google Cloud has achieved quarterly revenue exceeding $10 billion and operating profit exceeding $1 billion. Company executives confirmed during the earnings call that cloud revenue was boosted by demand for artificial intelligence (AI).

Although Google Cloud is still catching up to industry leaders Amazon AWS and Microsoft Azure in market share, revenue for this business segment grew by 28.4% year-on-year to $9.57 billion in the first quarter, up from 25.7% growth in the fourth quarter of last year, with growth rates doubling the overall revenue growth for several consecutive quarters

Google's core advertising business, which is also the main revenue driver closely watched by Wall Street, saw a slowdown in growth in the second quarter. Total revenue increased by 11.2% from the same period last year to $646.2 billion, slightly exceeding the market's expectation of $645.3 billion but lower than the first quarter's overall advertising revenue growth, which had increased by 13% year-on-year to $616.6 billion.

Among them, advertising revenue from the YouTube video platform increased by 13% year-on-year to $8.66 billion in the second quarter, falling short of the market's expectation of $8.95 billion. Revenue from Google Search and other sources increased by nearly 14% year-on-year to $485.1 billion, surpassing the expected $476.5 billion. Revenue from Google Network decreased by over 5% year-on-year to $7.44 billion, weaker than the expected $7.87 billion.

Company executives stated that search made the largest contribution to the overall revenue growth, with search growth particularly outstanding in the retail industry. Previously, analysts had suggested that due to the weak economy in 2022 and increased competition from TikTok, Google's core advertising business had weakened. However, since reporting negative growth in this business in the fourth quarter of 2022, advertising revenue has been steadily improving.

Revenue from Google Search and other sources increased by nearly 14% to $485.1 billion in the second quarter.

Meanwhile, revenue from Google subscriptions, platforms, and devices in the second quarter was $93.1 billion, slightly below the expected $93.8 billion. Combined with advertising revenue, this led to Google's service revenue increasing by 11.5% year-on-year to $739.3 billion, higher than the market's expectation of $735.8 billion.

In addition, "Other Bets" was once Google's technology innovation department, focusing on forward-looking product development and venture capital investment, including autonomous driving startup Waymo, smart medical company Verily, venture capital funds Google Capital and Google Ventures, etc.

In the second quarter, revenue from this business increased by 28% year-on-year to $365 million, weaker than the market's expectation of $389.6 million and significantly weaker than the nearly 72% revenue growth in the first quarter of this year. Operating losses expanded from $800 million in the same period last year to $1.13 billion. In the second quarter, Waymo opened its services to all users in San Francisco, marking the second citywide promotion after Phoenix in 2020.

Why is this important?

Google's parent company Alphabet and Tesla, which released their financial reports on the same day, can be said to have kicked off the earnings season for US tech giants. Last week, tech stocks just experienced a widespread sell-off, with the Nasdaq falling by 3.7%, marking the largest weekly decline in three months, while chip stocks and "AI darling" NVIDIA plunged nearly 9% in a single weekIf Google's financial report is as positive as expected by the market, it will prove that significant AI spending can continue to drive revenue growth in cloud computing and advertising businesses, helping to break the cautious market sentiment. This could have a positive impact on cloud computing giants such as Amazon, Microsoft, and even NVIDIA, the core hardware supplier behind AI, as well as boost the stock price of Meta, a competitor in the digital advertising industry.

What is the Focus?

Analysts agree that the key focus of this financial report will be whether artificial intelligence will generate meaningful revenue contributions, the health of advertising spending, the overall industry recovery progress, and the AI investment costs that may lower profit margins.

Wall Street generally believes that the growing demand for AI integrated into products will continue to boost Google's cloud business revenue in the coming quarters. Additionally, advertising revenue dominated by search and YouTube is also improving along with industry trends.

Google's advertising revenue will benefit from AI improvements in its core search business and will also profit from major events such as the Summer Olympics and the November U.S. presidential election. In May of this year, Google launched a search feature called "AI Overview," which generates a summary at the top of the search results page using AI. However, the accuracy of the content still needs improvement.

KeyBanc Capital Markets analyst Justin Patterson, who has a rating of "Overweight" on Alphabet with a target price of $200, stated that AI Overview is still a nascent product but is encouraging more user search behavior. He believes that over time, it will bring more targeted ads to support the growth of Google's core search business. Google Cloud will also benefit from the development of artificial intelligence.

Wall Street's View

Jefferies analyst Brent Thill stated that the fundamentals remain healthy, advertising spending is robust, similar to or even better than the first quarter of this year, and Google's paid search growth rate will reach around 15%:

"However, it is still too early to expect benefits from artificial intelligence, as most companies are still in the pilot phase, and substantial AI revenue is more likely to be realized in 2025 to 2026."

Wedbush analyst Scott Devitt is also optimistic about Google's continued strong momentum in search, believing that the AI Overview feature can create incremental user engagement and may become a driving force for monetizing the search business over time.

Another well-known tech stock analyst at the same brokerage, Dan Ives, has a "Neutral" rating and a higher target price of $205, stating that negative surprises related to capital expenditures are still a risk for Google and all major internet companies. However, the likelihood of such surprises in the second quarter is relatively low, as people have a better understanding of the surge in AI investment intensity and market expectations have already been adjusted.

KeyBanc pointed out that Alphabet still faces uncertainties such as the U.S. Department of Justice's antitrust lawsuit against its advertising technology business scheduled for trial in September, the upcoming U.S. presidential election, and the unknown duration of the large capital expenditure cycle related to AIAt the same time, the second quarter report is Alphabet's CEO Ruth Porat's transition to President and Chief Investment Officer, as well as the last complete quarterly financial report before the new CFO Anat Ashkenazi took office at the end of July. Some analysts expect "efficiency" to be a key topic during the earnings call, with the new CFO potentially further streamlining the bloated organizational structure.

Furthermore, prior to the financial report release, cybersecurity startup Wiz recently rejected Google's $23 billion acquisition proposal and instead opted to pursue an independent IPO listing. Google also recently ended its pursuit of acquiring customer relationship management software manufacturer HubSpot. Wall Street will undoubtedly focus on management's comments on merger and acquisition dynamics during the earnings call, as well as the latest developments in autonomous driving technology Waymo