Alphabet's Q3 performance exceeded expectations across the board, raising capital expenditures to $93 billion, with after-hours gains of over 7% | Earnings Report Insights

Google's parent company Alphabet announced its third-quarter earnings after the market closed on Wednesday, showing that the company's revenue, profit, and full-year capital expenditure guidance all exceeded analysts' expectations, with several major businesses achieving double-digit percentage growth. The Gemini APP has over 650 million monthly active users. The strong performance spurred the company's stock price to rise by as much as 7.7% in after-hours trading.

Here are the key points from Google's third-quarter earnings report:

Key Financial Data:

Revenue: Alphabet's revenue for the third quarter was $102.35 billion, compared to analysts' expectations of $99.85 billion; ex-tac (excluding traffic acquisition costs) revenue for the third quarter was $87.47 billion, compared to analysts' expectations of $85.11 billion.

Earnings per Share: Alphabet's net profit for the third quarter surged 41% to $28.5 billion; earnings per share were $2.87, higher than Wall Street's estimate of $2.26.

Free Cash Flow: Alphabet's free cash flow for the third quarter decreased 9% year-on-year to $24.5 billion.

Segment Data:

Cloud Revenue: Google Cloud revenue for the third quarter was $15.16 billion, compared to analysts' expectations of $14.75 billion.

Services Revenue: Google Services revenue for the third quarter was $87.05 billion, compared to analysts' expectations of $84.67 billion.

Search and Other Revenue: Google Search and Other revenue for the third quarter was $56.57 billion, compared to analysts' expectations of $54.99 billion.

YouTube Advertising Revenue: YouTube advertising revenue for the third quarter was $10.26 billion, compared to analysts' expectations of $10.03 billion.

Google Advertising Revenue: Google advertising revenue for the third quarter was $74.18 billion, compared to analysts' expectations of $72.46 billion.

Google Cloud Backlog: At the end of the third quarter, Google Cloud's backlog was $155 billion.

Other Bets: Including self-driving car company Waymo and life sciences division Verily, generated $429 million in revenue, but operating losses still reached $1.1 billion.

Alphabet and Google's CEO Sundar Pichai stated:

"Alphabet had a very outstanding quarter, with all major segments of our business achieving double-digit growth. We have achieved over $100 billion in revenue for a single quarter for the first time."

In regular trading on Wednesday, Google's stock rose 2.7% to close at $274.57. In after-hours trading, Alphabet's stock rose by as much as 7.5%. The stock has risen 45% this year.

AI Demand Stimulates Continuous Growth in Cloud Business

According to the financial report, Alphabet's quarterly revenue increased by 13% year-on-year, reaching $84.7 billion, marking the fastest growth rate since early 2022. As AI startups seek support and computing power from Google, its cloud business is growing. This segment's revenue for the quarter was $15.16 billion, exceeding market expectations of $14.72 billion.

Media reports indicate that the performance is likely driven by the rapid growth in corporate demand for its AI infrastructure. The department's "backlog" (the future revenue value from customer contracts) increased to $155 billion in the third quarter.

Media reports state that Google is continuing to narrow the gap with larger competitors—Microsoft Azure and Amazon AWS—driven by strong adoption of Vertex AI and custom Tensor Processing Units (TPUs).

In July, OpenAI added Google to its list of cloud infrastructure providers. Several media outlets reported in late August that Meta had signed a $10 billion partnership agreement with Google Cloud to use its services to meet the growing demand for AI computing power.

Shortly after the end of Alphabet's third quarter, OpenAI's competitor Anthropic announced an agreement with Google Cloud to use up to 1 million custom AI chips TPUs. Bank of America estimates that this collaboration could bring Alphabet up to $10 billion in revenue annually.

Capital Expenditure Far Exceeds Expectations

At the same time, the company is investing the highest amount ever to drive AI development and integrate the responses and assistance capabilities of its large language model Gemini into popular products, including search.

Alphabet stated that capital expenditures this year will reach $91 billion to $93 billion, higher than the previously expected $85 billion and the market expectation of $80.67 billion. This quarter, Google's capital expenditure was approximately $24 billion, while Microsoft's capital expenditure during the same period was $33 billion. The company's Chief Financial Officer Ruth Porat stated that Alphabet will continue to "invest funds to support AI growth," and capital expenditures are expected to remain high in the coming quarters to expand infrastructure.

Investors hope that Google's significant investments in AI will translate into business growth, especially in cloud service customers and search advertising. The company believes that these substantial investments in AI—including new infrastructure, research, and talent—are crucial for competing with large cloud computing rivals like Amazon and Microsoft.

Additionally, the revenue generated from renting out cloud servers in September of this quarter increased by 34% compared to the same period last year, further boosting the revenue growth rate of its parent company Alphabet. This achievement is partly attributed to selling cloud services to AI developers, allowing the company greater flexibility in its own AI investments while also enabling the construction of more data centers for clients, including Anthropic Google has been accelerating the launch of AI-driven new products to compete with its rivals. Last month, the company released the upgraded flagship AI model Gemini 1.5 Pro, which supports products such as Google Workspace, search engine, and cloud tools.

Although Google's chatbot Gemini still lags behind OpenAI, the company stated that the application has 650 million monthly active users, which means its weekly active users also reach hundreds of millions. OpenAI claims that ChatGPT has over 800 million weekly active users and expects this chatbot to generate billions of dollars in revenue in the coming years.

Despite rising costs, analysts believe that Alphabet's AI investments have begun to pay off. Jefferies analyst Brent Thill stated:

"Google is monetizing AI faster than expected, with tangible benefits in both cloud and advertising businesses."

Advertising Business Faces Intensifying Competition

As competitors significantly lower prices and launch new generative AI features, competition in the entire AI and cloud services market is intensifying. Alphabet's advertising division contributes the vast majority of the company's revenue, and this division is facing numerous competitors vying for advertising budgets. With interest rates expected to boost the economy, competition has become even fiercer.

However, analysts point out that some industry advertisers remain cautious in their spending due to tariff cost pressures and economic uncertainties brought about by the rapidly changing global trade environment.

Nevertheless, Wall Street expects Google to benefit as advertisers shift away from experimental advertising platforms like Snapchat.

A few days before this earnings report was released, AI leader OpenAI launched an AI browser called "Atlas," aimed at directly competing with Google's core search engine and browser ecosystem. The launch of this product is seen as one of the most severe challenges to Google's search dominance in recent years. Investors will also focus on how management responds to this rising competitive threat to its most profitable business.

Loop Capital analyst Rob Sanderson wrote in a report to investors on October 23:

"There remains significant structural uncertainty about whether Google can maintain its dominance in the search space."