Amid AI spending surge, Alphabet delivers on core products
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Alphabet's strong third quarter triggered a sigh of relief among investors who remain just as focused on the company's core products as its ballooning AI investments.
Why it matters: Companies — Big Tech in particular — have been eager to strut their AI strategies to Wall Street. But those plans require big spending, and that cash has to come from somewhere.
Catch up quick: Alphabet's search revenue, which made up 56% of the company's total, reached $49.4 billion in the third quarter, the company reported Tuesday night.
- YouTube ad revenue rose to $8.9 billion, a 12% increase from the same time last year.
- Both results exceeded Wall Street expectations.
Context: Alphabet has been a perfect study for the risk that AI poses to legacy platforms.
- Its core search and ad businesses have been viewed as being at high risk for displacement by generative AI services like OpenAI. Why "Google" when OpenAI can summarize a broader range of search results more effectively?
That's why Google and others have been racing to boost their generative AI capabilities.
- Capex spending shot up 62% to $13 billion last quarter, and a similar trajectory is expected for the current quarter, CFO Anat Ashkenaz told analysts.
What they're saying: CEO Sundar Pichai said the company's AI investments are "paying off."
- He cited efficiency examples ("more than 25% of all new code is generated by AI then reviewed and accepted by engineers") and improvements in product innovation, including its buggy AI Overviews search feature, which is driving greater usage.
What we're watching: Meta, another digital advertising giant that has been investing heavily in AI, turned in its earnings report this afternoon showing slower revenue growth than the second quarter.
