Google Q3 - Solid earnings but bad cloud

Google (also known as Alphabet) reported numbers on Tuesday night. They posted solid revenue and profit numbers but frustratingly, the share price dropped. The problem was that cloud computing only grew by 22%, instead of the 30% mark that analysts had been expecting.

For the quarter, revenue rose by 11% to $76.8 billion and profits by 42% to $19.7 billion. By far the most important part of the business is selling advertising, which briefly contracted earlier this year as some companies cut ad spend to save cash for a recession that never arrived. In a sign of strength, advertising grew 11% for the year, and YouTube did even better with 12% growth.

The market is worried that Google will be beaten by Amazon and Microsoft in cloud computing. If Google does fall behind, it will be very difficult to recover market share. It is worth noting that the cloud division is now bigger than YouTube with revenues of $8.4 billion, versus YouTube's $7.9 billion. The profits from Google Cloud are still very meagre though, generating an operating income of only $266 million.

Given Google's early entry into AI, many AI start-ups currently use Google Cloud for their operations, and as that industry scales, that will be a huge tailwind for Google.

Looking ahead, there are a few question marks about this business. What will the outcome be of the current anti-trust case? Will Google be able to keep up in the cloud computing race? How will AI impact it's search business? We back the Google management team though. Google is well entrenched in the global online ecosystem, and has the resources, cash and personnel, to compete in every related field.