Google's Q2 performance exceeded expectations, why is the market not buying it?

Google's second-quarter revenue and net profit both increased, but the market reaction was flat.

After the overnight trading of US stocks, Google's parent company Alphabet announced its second-quarter financial report for 2024. The report showed that the company's total revenue in the second quarter increased by 13.6% year-on-year to $84.74 billion, higher than analysts' expectations of $84.37 billion; adjusted earnings per share increased by over 31% year-on-year to $1.89, also higher than the expected $1.84.

However, the market reaction was volatile, with Alphabet's stock price rising 2% before falling 1%, then rising again and briefly increasing by 3%, but ultimately still falling by over 1.6%.

Although the overall performance exceeded expectations, Wall Street has some concerns about Google's profit momentum.

Firstly, the advertising revenue from the YouTube platform was lower than expected, with a 13% year-on-year increase to $8.66 billion in Q2, falling short of the market's expectation of $8.95 billion, and the growth rate also slowed compared to the first quarter.

This led to a slowdown in Google's main revenue driver, the core advertising business, with a year-on-year growth rate of 11.2% in Q2, lower than the 13% growth rate in the previous quarter.

Secondly, Alphabet stated during the earnings call that considering the new graduates joining in the third quarter, the number of employees may increase, which could threaten the trend of profit expansion. In addition, Alphabet's CFO Ruth Porat also added that the company is currently facing the risk of "increased depreciation expenses due to the intensified investment in technical infrastructure."

As it is well known, the main driving factor for the continuous significant increase in capital expenditures by tech giants including Google is AI.

Ben Reitzes, an analyst at Melius Research, commented:

"The reaction to this financial report may be relatively flat, as some comments during the earnings call seem to indicate a slowdown in the pace of profit margin expansion."

"Given the recent surge in capital expenditures by Alphabet and leading cloud computing companies, it is important to closely monitor these companies' comments on depreciation expenses when discussing earnings per share and gross profit margins, especially the Mag 7 including Microsoft, Amazon, and Meta."