Alphabet faces slowest revenue growth in four quarters amid rising competition

Alphabet is expected to report its slowest revenue growth in four quarters on Tuesday, impacted by competition affecting its core Google Search business and reducing YouTube ad spending. The slowdown in its primary business is anticipated to overshadow AI-driven gains in its cloud-computing segment for the third quarter. This quarter also marks the first since Anat Ashkenazi took over as finance chief from Ruth Porat.

Alphabet’s long-standing dominance in the digital ad market is being challenged by competitors like Amazon and TikTok, which have become popular with advertisers seeking to reach a ready pool of buyers. Additionally, Alphabet faces regulatory risks, with authorities considering breaking up Google to address what they term its “illegal monopoly” on online search.

Analysts predict Google Search and related revenue to grow by 11.6% in the third quarter, down from a 13.8% increase in the second quarter, according to Visible Alpha. MoffettNathanson analysts noted that new entrants like Perplexity and ChatGPT are raising significant funds on the premise that search can now be disrupted, and Google has been perceived as slow and unprepared for the development of GenAI. They added that this negative narrative might be challenging to disprove in the coming year, expecting significant changes in Google’s ability to maintain its exclusive search advantage on Apple and Android phones in the US.

A recent report by research firm eMarketer raised concerns among investors, indicating that Google’s share of U.S. search advertising revenue is set to fall below 50% next year for the first time in at least 18 years. Amazon’s search advertising revenue share in the US is expected to grow to 24% next year, while generative AI rivals like Perplexity AI, backed by Amazon founder Jeff Bezos, are also capturing some ad dollars from Google.

In response, Google is working to improve the effectiveness of its tools. It has started showing ads in the AI-generated summaries at the top of search results, a move analysts believe may help stave off competition. Alphabet’s shares fell nearly 9% in the three months to September, marking their largest quarterly drop since the third quarter of 2022. However, they have risen 17% so far this year.

Overall, Alphabet’s revenue is expected to have increased by 12.6% in the third quarter to $86.31 billion, slower than the 13.6% growth in the second quarter, according to analysts’ estimates compiled by LSEG. YouTube is also expected to have suffered from some marketers shifting spending to ad-supported tiers of streaming services like Netflix and Amazon Prime Video. YouTube revenue likely rose by 11.5%, compared with a 13% increase in the second quarter. Despite the deceleration, analysts from Truist expect YouTube, especially YouTube TV, to have benefited from a boost in political ad spending in the third quarter.

Google Cloud remains a bright spot, set to record faster growth of 29.2%, the biggest jump in seven quarters, as customers increased their spending on its AI services, including the Vertex AI platform that allows businesses to use the company’s models and develop their own custom models. Alphabet warned in July that capital expenses would remain high this year as it invested in AI to keep up with rivals. Google’s cloud peers have also flagged higher capital expenditures as they rush to enhance their offerings with AI. Amazon’s cloud business revenue likely rose by 19.3% in the September quarter, while revenue from Microsoft’s cloud unit is expected to have risen around 11%.

Investors will be keen to see how Chief Financial Officer Ashkenazi manages to keep other costs in check. BofA analysts noted that with her appointment, there is potential for the company to “surprise” with further cost-cutting actions after limited layoffs in 2024.