For better or worse, Alphabet Inc. has turned into a stock that uses artificial intelligence.
Investors have been paying increasing attention to the area of Alphabet’s (GOOG) (GOOGL) business that appears to be the strongest indicator of AI momentum, even if advertising still accounts for the majority of the company’s revenue. That’s Google’s cloud division, which performed poorly during the most recent quarter.
After Alphabet’s most recent report, Bernstein analyst Mark Shmulik stated, “If Google wants to be viewed and treated like an AI winner, we need some quantified KPI,” or key performance indicator. Even though Alphabet’s cloud revenue increased by 30% in the most recent quarter, he pointed out that this was a more severe decline than experts had anticipated. The third quarter saw a 35% growth rate.
Cloud growth reflects Alphabet’s efforts to gain market share against Microsoft Corp.’s (MSFT) Azure and Amazon.com Inc.’s (AMZN) Amazon Web Services. According to Shmulik, the cloud revenue miss indicates Alphabet is not making as much progress as it had hoped in its efforts to overtake its bigger rivals.
Shmulik, who has a market-perform rating on the stock, commented, “It’s difficult to decide whether to own the far-off third player in Cloud on the hope that they gain market share on the strength of their AI capabilities.”
According to Dow Jones Market Data, Alphabet’s stock is down 8.4% in morning trading on Wednesday, putting the business on course to lose $200 billion in market capitalization if the losses continue until the end of the day. That would be the biggest one-day drop in the company’s market capitalization ever.
Alphabet’s significant capital expenditures are also being closely examined by investors, especially in view of the cloud business’s supply shortages and search results that only partially live up to expectations. While analysts had been anticipating roughly $59 billion in capital expenditures for the year, Alphabet stated that it expects $75 billion.
In light of this, we are still unsure if Google will be able to profit more from AI.”or how quickly supply constraints in [the Google Cloud Platform] will be alleviated, so for the time being we alongside investors will need to wait for sharper product development/release signals to materialize,” UBS analyst Stephen Ju wrote in reference to “overviews” in comparison to conventional search engine results pages. On the stock, he has a neutral rating.
It’s also important to remember that not all AI stocks receive the same treatment. Given that its stock actually increased despite a higher-than-expected spending plan, Meta Platforms Inc. (META) appears to have gained greater credibility in the eyes of investors. Furthermore, Meta’s stock is trading at a premium to its own, whereas Alphabet’s is trading at a forward price-to-earnings multiple that is approximately consistent with its five-year norm.
“Shipping products and proving that they will indeed provide incremental multi-year revenue and cash flow growth remains the proof point that [Alphabet] needs to show,” Brian Nowak of Morgan Stanley wrote. Nowak’s rating remained overweight. Alphabet will probably be watching closely in the meanwhile because Meta has major plans to change how customers search.
