Alphabet’s Q4 earnings 2023: Ad revenue misses estimates, Google Cloud shines

Generative AI turned out to be the highlight of the previous year, and we witnessed the likes of Microsoft and Apple invest big in the rapidly-growing AI sector. Alphabet, the parent company of Google, was among those to have thrown their hat into the ring, but nonetheless, faced a turbulent response from investors as its shares dropped more than 6% in extended trading following the release of its Q4 and fiscal year 2023 financial report. While the overall picture presented commendable growth, certain key metrics, particularly in ad revenue, fell short of analysts’ estimates.

Alphabet’s Q4 earnings per share stood at $1.64, surpassing the expected $1.59, according to LSEG (formerly Refinitiv). The company reported total revenue of $86.31 billion, slightly exceeding the projected $85.33 billion by LSEG. Despite these positive figures, Alphabet encountered investor discontent due to underperformance in critical segments. For the year ended December 31, Alphabet’s diluted EPS rose to $5.80, while its revenue for the same period rose to $307.39 billion. Coming to its financial performance in other areas, Alphabet’s operating income for Q4 2023 increased to $23.69 billion, while the same for the year ended December 2023 amounted to $84.2 billion.

A notable success for Alphabet was the performance of its cloud computing division, Google Cloud. The segment reported revenue of $9.19 billion, beating the estimated $8.94 billion according to StreetAccount. This marked a 26% expansion compared to the same quarter the previous year. The operating income for Google Cloud showed a significant turnaround, reaching $864 million compared to a loss of $186 million a year ago. YouTube, a substantial revenue driver for Alphabet, demonstrated robust growth but fell slightly short of expectations. The platform’s ad revenue reached $9.2 billion, narrowly missing the estimated $9.21 billion according to StreetAccount.

Despite this, YouTube continues to be a vital player in Alphabet’s revenue mix. And despite commendable growth and strategic initiatives, Alphabet’s stock experienced a dip, shedding over 6% in extended trading. Currently, its shares are priced at $153.05. “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come,” Sundar Pichai, Alphabet CEO, commented on the matter.

Alphabet’s core business, online advertising, faced challenges as its ad revenue of $65.52 billion fell short of analysts’ estimates of $65.94 billion. While the company reported an 11% increase in overall advertising sales, concerns lingered over heightened competition in the online advertising space. Platforms like Facebook, TikTok, and Amazon are increasingly vying for a larger share of digital advertising budgets. Its Other Bets division, which includes the Waymo self-driving car business, clocked revenue of $657 million, as well as a narrowed loss of $863 million

Furthermore, the earnings revealed that in a bid to streamline operations and focus on growth areas, Alphabet implemented workforce reductions over the course of the previous year, resulting in 12,000 job cuts, equivalent to approximately 6% of its full-time workforce. The company reported a robust net income growth of 52% in Q4, amounting to $20.7 billion.

CFO Ruth Porat addressed severance-related expenses, stating that Alphabet recorded charges of $2.1 billion for 2023 due to workforce reductions. Looking ahead, Porat indicated that severance-related expenses in the first quarter of the new fiscal year would be approximately $700 million. “We ended 2023 with very strong fourth quarter financial results, with Q4 consolidated revenues of $86 billion, up 13% year over year. We remain committed to our work to durably re-engineer our cost base as we invest to support our growth opportunities,” Porat said.