Google parent company Alphabet is poised to report its slowest revenue growth in four quarters, underpinned by intense competition leading the way on its core revenue drivers, also known as Google Search and YouTube Ads. Even when Alphabet’s cloud division continues to post sizable gains, spurred by its AI work, the company’s traditional revenue pillars seem to be cracking. Investors are watching like never before for how Alphabet’s new finance chief, Anat Ashkenazi, will cut costs and stabilize the company’s earnings in a more crowded market since the position was last vacated with Ruth Porat.
Google Search Faces Rising Competition
Alphabet has been the big player in the digital advertising world, but its grip showing signs of loosening. New, more targeted opportunities that are gaining favor with advertisers are being offered by competitors such as Amazon and TikTok. Research firm eMarketer has indicated that over 2024, Google’s share of the U.S. search advertising market is poised to fall below 50 percent, a sign that the firm is no longer dominant in search after more than two decades. In the same timeframe, Amazon’s search advertising revenues are projected to expand by 24%, and upstarts like Perplexity AI, funded by Amazon founder Jeff Bezos, are also vying for a share of Google’s pie.
This pressure is reflected in the data Visible Alpha captures, which pries the third quarter’s Google Search and related revenue growth to 11.6% from the 13.8% seen in Q2. Meanwhile, industry analysts at MoffettNathanson have observed that new participants such as Perplexity and ChatGPT, backed with billions of dollars, may decimate search as we operate. Beyond the sexiness of it all, these tech-savvy entrants have put Alphabet’s Google to the test regarding things like being prepared for generative AI advancements, with a tangible risk to existing Alphabet search deals with Apple and Android in the U.S.
YouTube Ads Shift to Streaming Rivals
Over in YouTube, where Alphabet has long relied on the act as a growth engine within its portfolio, advertising dollars have begun shifting elsewhere. So, streaming giants like Netflix and Amazon Prime Video have lured marketers away from YouTube ad dollars. As a result, YouTube’s revenue is expected to have risen by only 11.5 percent in Q3 compared with 13 percent in Q2. But political season has been an escape valve, as YouTube TV boomed during a rise in political ad spending.
But Alphabet has had to adapt to prevent itself from falling behind. Now, the company has started to integrate ads into the summaries that sometimes appear at the top of search results written via AI. This approach, many analysts think, could help stave off some of the competitive pressure by creating new, interesting ad spaces.
Cloud Growth Continues to Surge
Its cloud division
remains one bright spot for Alphabet. Google Cloud has seen soaring demand as businesses strive towards AI. According to analysts, Google Cloud will see a 29.2 percent revenue increase in Q3, its largest jump in seven quarters. This growth echoes the lingo in the industry, as cloud service providers like Amazon Web Services have likewise pumped more capital into their AI-based offerings. This momentum has been driven by Alphabet’s Vertex AI platform, which provides businesses the ability to use Google’s models or build their own.
Eyes on Cost Control and Future AI Investments
Alphabet’s hefty capital expenditures have been made possible by its profligate investments in AI, but new CFO Ashkenazi may bring additional cost-cutting if the pace of spending proves unsustainable. After a relatively mild round of layoffs in March, Gara has said analysts at BofA have suggested Alphabet is contemplating more ‘self-help’ strategies to lower expenses, including further rounds of layoffs.
Alphabet’s stock, however, has already begun to fray. Alphabet’s shares also posted steep losses in the three months to September: they are down some 9 percent, their biggest fall since Q3 2022. But shares of Alphabet are still up 17% on a year-to-date basis.
Investors will be paying close attention to how Alphabet’s earnings will reflect new CEO Ashkenazi’s approach to striking the balance between spending on innovation and smart spending. Alphabet could set the pace for its strategic direction in a suddenly volatile tech and digital advertising landscape, amid AI and increased competition reshaping the space.
