Shares of Alphabet Inc. fell more than 5% in after-hours trading today after it reported a solid fourth-quarter earnings beat but missed expectations on advertising revenue.

The company reported its fastest quarter in terms of revenue growth since early 2022, with sales rising by 13% from a year earlier, to $86.31 billion. Earnings before certain costs such as stock compensation came to $1.64 per share. Both numbers came in ahead of Wall Street’s expectations, with analysts looking for revenue of just $85.33 billion and earnings of just $1.59 per share.

Alphabet’s net income for the period rose 52%, to $20.7 billion, while operating margin, which is the profit left over after subtracting business running costs, rose from 24% to 27%. Operating income for the quarter came to $864 million, up from a loss of $186 million a year before.

The results were decent overall but far from enough to satisfy picky investors, who had pushed Alphabet’s stock to a new all-time high just one week earlier. The problem was that the company’s ad revenue came in at just $65.52 billion, below the analysts’ target of $65.94 billion. YouTube ads, which has been a key growth accelerator in recent quarters, also fell $10 million shy of estimates at $9.2 billion.

Investors are concerned because Meta Platforms Inc.’s advertising business appears to be growing much faster, while TikTok remains a competitive threat because it’s far more popular with younger users.

Moreover, Alphabet’s results suggest uncertainty about interest rates is giving advertisers pause, Thomas Monteiro, senior analyst at Investing.com, told SiliconANGLE in an email.

Indeed, Google Cloud remains a bright spot for Alphabet, with revenue growing by 26% in the last quarter. The cloud computing business is notably now consistently profitable after losing money for years as Alphabet scrambled to keep pace with the growth of rivals Amazon Web Services Inc. and Microsoft Corp.

In a statement, Alphabet Chief Executive Sundar Pichai (pictured) said the company is continuing to prioritize its investments in artificial intelligence, in particular by embedding generative AI into some of its key products and services. However, those investments require a sacrifice, he explained, hence the need for cuts to be made elsewhere. That explains why the company recently announced further layoffs in various parts of its business, adding to last year’s 12,000 job cuts.

“We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud,” said Pichai, adding that “each of these is already benefiting from our AI investments and innovation.”

Last month, Google Cloud launched what is said to be its biggest and most powerful large language model ever, called Gemini. The company wants to license Gemini to customers via Google Cloud, so developers can integrate its capabilities into various kinds of applications and improve its adoption. “As we enter the Gemini era, the best is yet to come,” Pichai insisted.

Another bright spot came in Alphabet’s Other Bets division, which includes the Verily life sciences business and the Waymo self-driving cars unit. The segment reported revenue of $657 million during the quarter, up from just $226 million one year earlier. Profitability there improved too, with losses narrowing to $863 million from $1.24 billion a year prior.

The latest results suggest that Google has managed to halt the immediate threat of generative AI to its internet search business, said Holger Mueller of Constellation Research Inc. He pointed out that many had expected generative AI services to begin hurting Google’s search revenue, but in fact that hasn’t happened. “It looks like Google has thwarted that threat, at least for now, while its YouTube platform is also growing well,” Mueller said. “We also saw strong growth in Google Cloud, which is now close to breaking the $10 billion recurring revenue barrier. With Google’s progress in generative AI, epitomized by the release of its new Gemini models, Sundar Pichai and Google head into 2024 with a much stronger AI story than their cloud rivals.”

Ruth Porat, Alphabet’s president, chief investment officer and chief financial officer, said last year’s workforce reductions resulted in severance related charges of $2.1 billion during fiscal 2023. In addition, the company also vacated some of its offices, adding further charges of $1.2 billion in the past quarter, and $1.8 billion for the full year.

Prior to today’s after-hours drop, Alphabet’s stock was up 56% in the last 12 months. Rivals Microsoft and Meta have also seen their shares reach all-time highs in recent days, as investors bet on a recovery in the technology industry this year.

Microsoft delivered strong quarterly results of its own earlier today, while Meta, Amazon and Apple Inc. are set to publish their latest financial reports tomorrow.

Photo: Google