Topline
Shares of Alphabet staggered Wednesday as worries grew about the Google parent losing ground to rival Microsoft in AI and cloud computing, though some analysts say the selloff is an overreaction missing the forest for the trees.
Alphabet CEO Sundar Pichai’s firm faced a steep selloff as its cloud business disappointed.
Key Facts
Alphabet beat analyst forecasts for total revenue, profit and sales in its most lucrative advertising division in its Tuesday afternoon earnings report, but the firm’s cloud business disappointed top and bottom line estimates.
The cloud slipup was the “only issue” in the report, according to Rosenblatt analyst Barton Crockett, but it proved to be an issue that weighed heavily on investors.
In an ill-fated turn, a Microsoft earnings report released the same afternoon as Alphabet revealed its cloud unit grew more than expected, sending its shares up 2%, another victory for Microsoft in the nascent battle for artificial intelligence dominance.
Alphabet shares slid 9% to about $126 in the first minutes of Wednesday trading, set for their steepest loss since last October.
The third-quarter earnings report “killed” two of the three most common bullish arguments for the stock, Bernstein analysts led by Mark Shmulik wrote to clients, explaining the company’s ability to capitalize a larger market share in cloud computing and to broadly improve margins seem to be increasingly unlikely outcomes.
Crucial Quote
MoffettNathanson analyst Michael Nathanson wrote to clients he believes concerns about Alphabet’s are “well-founded and revolve around the cost to compete on the journey to greater AI dependency.”
Chief Critic
“Owning Alphabet for its cloud business is like rooting for Michael Jordan to play baseball,” Wedbush analysts led by Scott Devitt wrote in a Wednesday note to clients, nodding to the billionaire NBA legend Jordan’s brief foray into minor league baseball. The stock selloff was “overdone” as Alphabet’s cloud unit accounts for just 11% of sales compared to a 78% share for the ad segment, which easily topped third-quarter estimates.
Tangent
In their earnings call, Alphabet leadership failed to provide much insight into how YouTube’s pricey Sunday Ticket package impacted financial results. This is the first year of YouTube’s $2.5 billion per year contract with the NFL to broadcast the league’s out-of-market games.
Further Reading
Source: https://www.forbes.com/sites/dereksaul/2023/10/25/alphabet-stock-set-for-worst-day-in-12-months-as-microsoft-again-asserts-ai-lead/