The hype generated by the release of ChatGPT, the artificial intelligence (AI) search engine chatbot created by OpenAI and backed by Microsoft (MSFT 1.57%), caused consternation among Alphabet's (GOOG 0.56%)(GOOGL 0.42%) investors. And for good reason: As shown below, Google Search provided 56% of the company's total revenue in the fourth quarter of 2022.
Source: Alphabet.
Google Search dominates the market with a share of almost 85%, easily besting Microsoft Bing's 9%. While it's too early to know if ChatGPT is an actual threat, especially since Alphabet has its own AI in the works, putting too many eggs in one basket isn't wise.
Alphabet's Google Cloud and YouTube segments are integral to the company's prospects and investors' long-term profits.
Google Cloud doubles its revenue in two years
Alphabet has invested heavily to become the third-largest cloud infrastructure provider in the world, behind Amazon's AWS and Microsoft Azure, and it's paying off. Revenue has doubled since 2020, including a 37% increase last year, to reach $26.3 billion, as shown below.
Data source: Alphabet. Chart by author.
Google Cloud owns just 10% of this fast-growing market, so it has plenty of room for gains; however, competition is fierce. The growth also took a hit in the fourth quarter, falling to 32%, as companies cut back on spending. Still, the demand for cloud services will far outlast the current economic challenges, making this fertile ground for years of gains.
Alphabet has sacrificed profits for sales growth in this segment (Google Cloud reported a loss from operations of $3 billion in 2022). But with the company becoming more cost-conscious and the segment's losses narrowing, operating profit should come soon. Results from this segment are crucial to the company's long-term success.
Alphabet must do more with YouTube.
YouTube is a powerhouse in the lucrative video platform market, with 2.5 billion monthly active users last year -- second only to Meta Platform's Facebook -- but there is potential for much more. YouTube ad revenue grew a paltry 1% to $29.2 billion in 2022 after an incredible 46% gain in 2021.
The economy is partly to blame because of decreased appetite for ad spending, as is competition. But Alphabet has a tremendous opportunity to spur growth with YouTube Shorts, its short-form video platform that competes directly with TikTok.
Some estimates put TikTok's annual ad revenue at $31 billion within five years, but it has a big problem. TikTok has been banned on federal government devices and by several states. And it faces a nationwide ban due to serious privacy concerns with its Chinese parent company, ByteDance. Alphabet should push YouTube Shorts as a clear alternative to capture market share, whether TikTok is ultimately banned or not.
Google Search is still the straw that stirs the drink at Alphabet, but investors should closely monitor Google Cloud and YouTube results. These could hold the key to future gains.
