Sundar Pichai Reported Alphabet's Cloud Revenue Grew 103% Last Quarter While the Gemini App Reached 1 Billion Monthly Users. Is Google Cloud Becoming a Bigger Growth Driver Than Search?
Key Points
In the last 12 months, the cloud segment added significantly more incremental revenue than the search platform.
Throughout Alphabet’s entire history, no product has grown faster than the Gemini App.
Part of the growth stock’s 28% fall from its peak is likely due to concerns about AI’s long-term impact on Google Search.
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Once again, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) reported accelerating growth in one critical area of its business. Google Cloud posted a jaw-dropping year-over-year revenue gain of 103% to $30.7 billion during the third quarter. This is on top of a stellar 82% jump in Q2.
CEO Sundar Pichai said that performance was "powered by huge demand for our AI infrastructure and AI solutions." Demand for the company's Tensor Processing Units is also robust.
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Furthermore, the Gemini App reached 1 billion monthly active users. For Alphabet, it's the fastest-growing product in history.
The business that was built on the dominance of its Google Search platform is now being defined by its cloud segment. This matters to the investment case.
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A massive backlog indicates robust cloud demand
The "Magnificent Seven" stock tanked after its Q3 financial results were announced. The market was likely concerned with slowing Google Search growth, with revenue up just 12% in the quarter. This was down from a 17% increase during Q2. Queries were up significantly. However, the budding AI Mode doesn't monetize as well because there is lower advertising density. Management hopes more search volume and new ad placements are the solution.
Google Search added an incremental $6.8 billion in ad revenue over the last 12 months. Strictly based on dollar terms, this figure was much lower than the $15.6 billion of sales that Google Cloud added. The search segment's $63.4 billion in quarterly revenue, though, still makes it the company's main top-line contributor.
But the cloud platform's pace of expansion seems to be capturing all the attention. Looking ahead, it's probably going to be Alphabet's primary growth engine. In five years, its share of overall revenue should be much larger. A massive $561 billion Google Cloud customer backlog shows how much demand there is.
Google Cloud's infrastructure is also what powers the Gemini App. More cloud revenue means the business has the ability to continuously invest in better AI capabilities. This is a flywheel that helps to keep Alphabet's family of models at the leading edge, further strengthening the Gemini App's competitive position.
Even with Google Cloud performing at an exceptionally high level, this growth stock, down 28% from its peak, trades at a forward price-to-earnings ratio of 19.3. The market is concerned about the long-term impact artificial intelligence (AI) will have on Google Search. Are its best days in the past?
And the company's gargantuan capital spending plan has pushed quarterly free cash flow into negative territory. What financial returns AI will ultimately bring is the most important question Alphabet shareholders have to wrestle with.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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