By Alphabet, the parent company of Google, has encountered significant challenges in its core search business this year, largely due to a downturn in the digital advertising market and concerns about the potential impact of AI chatbots on web traffic.
However, despite these obstacles, Alphabet’s second-quarter earnings report presented a more positive picture. The company’s revenue surged by 7% to reach $74.6 billion, exceeding analysts’ expectations. Additionally, their profits performed better than anticipated, resulting in a 6% increase in the stock price during extended trading.
The digital advertising market has been struggling due to economic uncertainties and cost-cutting measures adopted by businesses. While Google’s ad revenue only grew by 3.3% compared to the previous year, it was an improvement from the first quarter, which saw a decline in ad revenue. On the other hand, Snap, the parent company of Snapchat, faced more significant challenges, issuing a disappointing forecast that caused its stock to plummet by almost 20%.
During the investor call following the earnings results, analysts noted that linear TV, ad agencies, and smaller digital companies were experiencing weakness. However, Alphabet managed to accelerate its growth in the second quarter.
One of the primary concerns for investors has been the potential shift of traditional search users to AI chatbots, particularly those developed by OpenAI and Microsoft. Microsoft’s Bing search engine integrated OpenAI’s ChatGPT earlier in the year, raising questions about Google’s ability to retain its search business dominance. Nevertheless, Google’s search revenue demonstrated steady growth, offering reassurance to investors.
Alphabet’s CEO, Sundar Pichai, pointed to the company’s own homegrown chatbot called Bard, which has received significant investment in recent months. While Microsoft embraced OpenAI’s technology, Alphabet has been working on its Search Generative Experience (SGE), which can synthesize search results from complex queries. However, the company has not yet announced a public release date for SGE.
Despite the challenges and competition in the AI space, executives emphasized that AI is integral to Alphabet’s future success. They repeatedly mentioned AI during the investor call, reassuring stakeholders that the technology is being utilized across the company. Pichai even mentioned how AI will revolutionize search, providing users with more diverse search options and breaking away from conventional limitations.
AI has already found applications beyond search, with plans to automate customer service using new AI models. The company aims to enhance its products through AI-driven advancements, thereby improving the overall user experience.
One area where Alphabet remains poised for growth regardless of market conditions is in cloud infrastructure. Competing with Amazon Web Services and Microsoft Azure, Google’s cloud business turned profitable in the first quarter and continued to thrive in the second quarter, with revenue increasing by 28% to reach $8 billion. Many AI companies are turning to Google’s cloud technology to handle compute-intensive projects that are otherwise available only in limited places.
Pichai highlighted that more than 70% of “unicorn” companies, referring to billion-dollar tech startups, in the generative AI space are customers of Google Cloud. Notable examples include Cohere, Japser, and Typeface.
Alphabet has faced challenges in its core search business due to a slumping digital ad market and the rise of AI chatbots. However, the company demonstrated resilience and growth in other areas, such as cloud infrastructure, and remains optimistic about the potential of AI to transform various aspects of its operations. As the company continues to innovate and invest in AI technologies, it anticipates overcoming challenges and maintaining its position as a tech industry leader.
