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Alphabet Faces Selling Pressure due to Disappointing Cloud Computing Growth

2 Mins read

Alphabet is currently facing intense selling pressure on Wall Street as investors react negatively to the company’s underwhelming third-quarter growth in its cloud computing business.

Despite generally positive third-quarter results at Alphabet (ticker: GOOGL), with both revenue and profits surpassing Street estimates, the 22% revenue growth rate at Google Cloud fell significantly short of expectations. This represented a deceleration from the 28% growth witnessed in the previous quarter.

While Alphabet’s advertising business, encompassing search and YouTube ads, performed admirably, the lackluster performance of its cloud division marred the overall results. The timing of this disappointment was particularly unfortunate as it coincided with Microsoft’s (MSFT) better-than-expected results for its Azure cloud computing business.

Alphabet acknowledged that customers remain primarily concerned with reducing costs and optimizing their cloud spending, causing a slowdown in cloud revenue growth across the industry. Microsoft also faced the same trend but managed to surpass estimates, while Alphabet fell short.

In response to these developments, Monness Crespi Hardt analyst Brian White downgraded Alphabet stock from Buy to Neutral. White particularly noted the “opaque” tone of the company’s post-earnings conference call.

Despite the setback encountered by Alphabet in its cloud computing business, the company remains a dominant force in the advertising industry, suggesting that it will need to strategize and adapt to revitalize its cloud division’s growth.

Introduction

Evasive Commentary Raises Concerns

According to one analyst, the tone of the earnings call was filled with evasive commentary, leaving investors without a clear path forward. This is especially troubling considering the growing demand for major artificial intelligence (AI) investments and the emergence of stronger competitors. With the macro environment also becoming increasingly uncertain, the lack of a definitive strategy raises red flags.

A Leadership Vacuum

Another point of concern is the absence of a replacement for Alphabet’s outgoing CFO, Ruth Porat. Although it was mentioned during the earnings report that Porat would be transitioning to a new role overseeing the company’s Other Bets portfolio, no official announcement has been made regarding her successor. This leads some analysts to suggest that bringing in an executive who can effectively communicate with Wall Street would be a wise move for Alphabet’s board.

A Challenging AI Journey

One analyst aptly describes the road ahead for Alphabet as a “long, treacherous AI journey.” While many remain optimistic about the stock’s prospects, there are ongoing worries about how increased spending on AI infrastructure will impact the company’s profitability. The recent earnings report revealed that Alphabet’s operating income and margins fell short of estimates, further fueling concerns.

Mixed Reactions from Analysts

Despite the cloud miss being a significant factor contributing to Alphabet’s lackluster performance, most analysts are maintaining a bullish outlook on the stock. This sentiment is echoed by Wedbush analyst Scott Devitt, who believes the sell-off has been overdone. Devitt points out that the cloud division contributes just 11% to Alphabet’s revenue and a mere 1% to its operating income.

Supporting this perspective, Rosenblatt analyst Barton Crockett emphasizes that the cloud miss was the only standout issue in the results, leading him to consider the quarter as thematically mixed. Crockett’s Buy rating on the stock remains unchanged, and he has even raised his price target from $163 to $174.

Conclusion

While there are concerns regarding Alphabet’s recent earnings report and the overall AI landscape, analysts’ opinions vary on the severity of these issues. The need for clear communication with Wall Street and a solid strategy going forward is highlighted, but some maintain their optimism for the company’s future. As Alphabet navigates these challenges, the path it chooses will undoubtedly shape its trajectory in the ever-evolving tech industry.

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