Alphabet
is coming under intense selling pressure Wednesday as Wall Street punishes the stock for disappointing third-quarter growth in the company’s cloud computing business.
Customers’ continued focus on reducing costs is apparently trumping the emerging opportunity in generative artificial intelligence.
Alphabet shares dived almost 9% to $126.36 in recent trading.
Overall third-quarter results at Alphabet (ticker: GOOGL) were fine, with both revenue and profits exceeding Street estimates. But the 22% revenue growth rate at Google Cloud came in well short of expectations, decelerating from 28% growth in the June quarter.
Alphabet’s financial results continue to be dominated by its advertising business—both search and YouTube ads came in ahead of expectations. But the Cloud miss was stark, and ill-timed: The results arrived the same afternoon that
Microsoft
‘s (MSFT) results for its Azure cloud computing business came in ahead of Street expectations.
Alphabet said it continues to see customers focused on “optimizing” their cloud spending, a trend that has slowed cloud revenue growth at all providers in recent quarters. Microsoft noted the same trend, but nonetheless managed to exceed estimates, while Alphabet missed.
Monness Crespi Hardt analyst Brian White responded to the news by lowering his rating on Alphabet stock to Neutral from Buy. Among other things, White found the tone of the company’s post-earnings conference call to be “opaque.”
“In our view, the tone of the call was riddled with evasive commentary with no clear path forward during a period that increasingly demands major AI investments, combined with the risk of stronger competitors and a darkening macro environment,” White writes in a research note.
He noted that when Alphabet reported June quarter results, it said CFO Ruth Porat was shifting into a new role, overseeing the company’s Other Bets portfolio. But no replacement for Porat has been announced yet. On that score, White has some advice for the Alphabet board: “We believe it would be wise to bring in an executive who speaks the language of Wall Street.”
The analyst added that the company faces “a long, treacherous AI journey.”
Most other analysts are staying bullish on the stock, although the cloud miss was not the only issue. Alphabet’s operating income and margins were shy of estimates, and there are ongoing concerns about how acceleration in AI infrastructure-related spending will affect profitability.
Wedbush analyst Scott Devitt, however, says the stock’s sell-off seems overdone; he points out in a research note that the cloud accounts for just 11% of Alphabet revenue and only 1% of operating income.
Striking a similar note, Rosenblatt analyst Barton Crockett writes that the Cloud miss was the only issue in the results, “which made the quarter thematically mixed.” He kept his Buy rating and upped his target on the stock to $174 from $163.
Write to Eric J. Savitz at [email protected]
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