Alphabet (GOOG) Q3 2024 Earnings Review (Jul-Sep 2024)

Search and advertising giant Google’s parent company, Alphabet, posted its Q3 2024 earnings after market close on October 29, beating market expectations on revenue and profit fronts. Cloud services accelerated impressive growth, addressing market concerns about “whether AI demand is actual? ” The stock surged +5.8% in after-hours trading.

Alphabet (GOOG) Q3 2024 Financial Results

• Revenues: $88.27B (YoY +15.1%)
• EPS: $2.12 (YoY +37%, Record High)
• Operating Income: $28.52B (YoY +33.6%)

Segment Performance

Google’s advertising revenue rose 10% YoY from $65.85B to $59.65B, maintaining a growth momentum similar to the previous quarter, primarily driven by Google Search and YouTube ads. Google Search revenue grew 12% to $49.39B, beating the street consensus of $49.02B and matching heightened buy-side expectations, with growth primarily driven by financial services and retail sectors. YouTube ads increased 12% to $8.92B, surpassing market expectations of $8.89B, boosted by U.S. election-related spending. Google Network ads declined -2% YoY to $7.55B, showing improvement from the previous quarter’s decline.

Google Cloud revenue reached $11.35B, posting 35% YoY growth and exceeding analyst expectations of $10.88B. The growth rate accelerated from last quarter’s 29%, marking the fourth consecutive quarter of accelerating growth. Notably, riding on strong AI product performance, Google Cloud’s operating profit surged from $266M to $1.947B YoY, setting a historical record. Operating margin jumped from 3.2% to an all-time high of 17.1%, suggesting Google’s long-term cloud investments are finally bearing fruit and showing signs of catching up with Azure and AWS.

Other revenue (including hardware, Google Play Store, and YouTube non-advertising revenue) grew 28% YoY to $10.66B, driven by YouTube subscription growth and Pixel 9 launch.

Other Bets (including Waymo autonomous driving and Verily life sciences) saw revenue growth of 31% YoY, though operating losses remained at -$1.116B, only narrowing by about 6.5% YoY.

Financial Metrics

FX headwinds impacted revenue by -1 percentage point in Q3. Excluding currency effects, all global segments posted double-digit growth. The home market in the U.S. led with 19% growth, while EMEA, APAC, and other Americas grew by 13%, 13%, and 25%, respectively, reflecting a gradual recovery in global advertising markets.

Despite aggressive AI R&D investments (reflected in an 11% YoY increase in R&D expenses) and new product launches (a 5% YoY increase in marketing expenses), disciplined cost management drove operating Income up 34% YoY. Operating margin expanded from 28% to 32% YoY, pushing net Income up 34% to $26.3B, both metrics beating Wall Street expectations (30.8%, $22.95B). In summary, Google achieved record highs in revenue, operating Income, and net Income, with profit growth significantly outpacing revenue growth.

Traffic Acquisition Costs (TAC) came in at $13.72B, up 9% YoY but below the consensus of $13.54B. Ex-TAC revenue reached $74.55B, growing 16% YoY and beating Street estimates of $72.9B. The TAC-to-advertising revenue ratio declined YoY, supporting margin expansion.

Alphabet (GOOG) Q3 2024 Earnings Call

CEO Sundar Pichai highlighted robust operational momentum across all segments. Strong revenue growth coupled with continued efficiency improvements drove higher margins, demonstrating how long-term investments in innovation and AI are beginning to bear fruit. These investments deliver value to consumers and partners through Google’s AI tools, with plans to drive further innovation and product improvements for global users, customers, and creators.

On capital expenditure, Google invested $13B in Q3, primarily in server infrastructure expansion, with Q4 spending expected to remain at similar levels. Management expressed satisfaction with cost structure improvements while noting growth potential in cloud profitability, though maintaining competitiveness requires continued investment. Overall, Google remains committed to enhancing operational efficiency.

Search and Advertising

In search, Google’s AI Overviews, widely rolled out in the U.S. in mid-May, now summarizes search results and displays relevant product ads. The new AI Overviews demonstrate marked improvement over earlier versions (which faced hallucination issues), reaching over 1 billion monthly active users.

Google’s generative AI search service is set to roll out in over 100 regions, receiving positive user feedback. Google Lens has become the fastest-growing search feature, exceeding 20 billion monthly uses. The new Circle to Search feature, available on 150 million Android devices, has shown strong adoption. Enhanced search capabilities are driving increased user engagement.

Notably, AI search particularly resonates with younger demographics, with a positive reception to integrated ads in AI overview results. Google notes that AI search products remain in the early stages with rapid evolution ahead.

Addressing profitability concerns around AI search, Pichai highlighted that through hardware, engineering, and technical breakthroughs over the past 18 months, Google has reduced AI response generation costs by over 90% while doubling the scale of its Gemini model, supporting expansion and margin improvement in AI Overviews.

In advertising, search revenue growth was led by financial services and retail sectors, with brand advertising outpacing performance ads. Google actively implements AI across ad creative generation, buying, and performance measurement. Declining third-party network ad share has reduced TAC ratios. Significantly, AI Overview ad monetization has reached parity with traditional search ads, indicating the successful commercialization of new technology.

Cloud Services

In cloud services, robust generative AI demand effectively drove overall market growth. GCP’s growth outpaced overall Google Cloud performance. The increase stemmed from AI services, GCP core services, and Workspace. Enterprise demand for Google Cloud AI services remains strong and is expected to maintain robust growth momentum.

AI

Gemini model achieved breakthrough progress over 18 months, doubling parameter scale while reducing inference costs by 90%. Demand shows strong growth, with formal integration into GitHub Copilot and widespread NotebookLM adoption indicating significant development potential. Notably, Gemini API usage has grown 14x over the past six months. The model now integrates across products, platforms, and devices, reaching an estimated 2 billion monthly users through various Google services.

In product development strategy, Google is considering offering traditional and AI search engines simultaneously for A/B testing to accelerate product improvements.

Internal AI applications have reached a significant milestone, with approximately 25% of code now AI-assisted and engineer-reviewed, substantially improving internal development efficiency.

YouTube

YouTube showed strong performance, with total revenue (including ads and subscriptions) exceeding $50B over the past four quarters. The company plans to launch video generation models for YouTube Shorts by year-end to enhance creator short-form content capabilities. YouTube Shorts now reaches 70 billion daily views, with improving monetization metrics.

Waymo

Waymo continues to advance in autonomous driving, completing over 150,000 paid rides weekly with over 1 million miles driven. The upcoming sixth-generation vehicle is expected to reduce unit operating costs significantly. Waymo recently secured $5.6B in new funding to expand its partnership with Uber (UBER), extending autonomous taxi services beyond current operations in Los Angeles, San Francisco, and Phoenix.

Others

In other business areas, Google will deepen hardware collaboration with Samsung.

Regarding ongoing antitrust litigation, Google declined to comment but affirmed its commitment to defending company interests.

Additionally, Google demonstrated a commitment to sustainable energy by pre-purchasing power from small modular nuclear reactors to support its AI technology development.

Review and Analysis

Google maintains strong operational momentum across three key areas: stable advertising revenue growth, AI-driven cloud service expansion, and optimized cost structure. Operations are expected to remain positive over the next 12-24 months. While cost optimization may not match Meta’s level, the enhanced cost structure remains a significant long-term positive factor.

Search Business

Despite high base effects, search maintained impressive growth. Market concerns about ChatGPT and other AI answer engines appear addressed through:

1. AI Overview deployment protecting existing market share
2. Innovative search feature development, including Google Lens and Circle to Search

Notably, AI Overview monetization achieving parity with traditional search has boosted market confidence in AI product commercialization.

Overall, while the search business faces challenges, concerns appear manageable. Google’s aggregate search activity may not necessarily decline even if other AI services capture some search volume.

YouTube

Google effectively disclosed YouTube subscription revenue this quarter – stating $50B in total YouTube revenue over four quarters, while published data shows $34.87B in advertising revenue, implying $15.13B in subscription revenue, representing 43.4% of YouTube ad revenue and 30.3% of total YouTube revenue.

YouTube ad business faces high base effects, but the theoretical lowering of content creation barriers through AI generation models for Shorts should foster a more vibrant ecosystem.

YouTube TV’s continued investment in NFL sports rights represents an essential living room strategy. In the next few years, there will be increased competition in sports broadcasting on streaming platforms, including YouTube, Netflix, and Amazon Prime. Competition between YouTube and Netflix will gradually intensify from current moderate levels.

Cloud and AI

Google Cloud’s impressive growth reflects materializing AI business benefits. Market concerns about AI capital expenditure should significantly decrease following this quarter’s growth rate and operating margin figures.

In competitive dynamics, OpenAI’s model market advantage has gradually narrowed, with Google’s Gemini and Anthropic’s Claude establishing market acceptance. Google, Anthropic, and OpenAI all have ongoing computer-using agent (CUA) initiatives.

CUAs enable AI to recognize screen information and perform search, input, record, output, and application execution tasks. Initial skepticism about computer and AI control has given way to current reality: social networks control preferences, phones manage passwords, calendars, and notes, and computers handle increasingly personal and business confidential information.

Security and privacy failures will lead to consumer abandonment. While controlling user data, Apple devices emphasize privacy with Watch’s health information consolidation, possibly preparing for medical service integration.

Major model providers show limited sustainable competitive advantages. As time progresses, edge device and service integration appear to be the decisive factor.

Waymo

Google’s recent intensification of Waymo’s PR efforts reflects competitive pressure from Tesla. However, despite Google’s resources, Waymo may face promotional cost disadvantages unless Tesla encounters significant technical bottlenecks.

Conclusion

Despite initial market concerns about OpenAI’s rise threatening Google’s core business, evidence shows Google has demonstrated resilience against AI challenges and successfully strengthened its competitive position. Excluding external regulatory factors like antitrust issues, Google’s core business model remains robust, derived from its structural advantage as the primary intermediary between users and information.

Notably, the cloud business’s transition to profitability marks a successful extension of Google’s technical advantages into new revenue streams, gradually forming a second revenue pillar alongside advertising.

Strengths and Opportunities for Alphabet (GOOG) Q3 2024

• Search business maintains solid growth with AI search monetization matching the traditional search
• YouTube continues expansion in the streaming market
• Cloud business benefits from growing AI computing demand with significantly improved operating margins
• Leading AI computing infrastructure demonstrates the ability to reduce generative AI search costs sustainably

Weaknesses and Threats for Alphabet (GOOG) Q3 2024

• YouTube advertising growth momentum softening
• Third-party advertising network businesses are declining
• Google Cloud faces challenges in breaking the existing market structure
• Waymo autonomous driving faces market promotion and competitive pressures
• Potential significant negative impact from antitrust rulings
• Hardware product line competitiveness needs enhancement