Alphabet's (GOOG 9.96%) (GOOGL 10.22%) cloud computing business managed to turn profitable at a very peculiar time. Google and its parent company obviously want the fast-growing Google Cloud platform to keep pulling its financial weight in the long run, but you should probably not expect those operating profits to stay predictably positive over the next few years.
You see, Alphabet has many other priorities to worry about, and one of the most expensive projects is going through a quantum leap of change and opportunity right now. Those cloud computing profits may have to wait a while as Alphabet optimizes its budgets in support of artificial intelligence (AI).
AI in everything, everywhere, all at once
When Alphabet's first-quarter earnings call started, I decided to tally how often management mentioned AI. Twenty minutes later, I put my pencil down and gave up. I already had 32 lines on my paper by then, probably missing a few along the way. I respect court stenography a lot, but I'd be fired if that were my job.
But the larger point was clear anyway -- CEO Sundar Pichai and CFO Ruth Porat simply couldn't stop talking about AI. Diving back into the call transcript, AI turned out to get more airtime than "growth," "cloud," or "Google," and it was an evenly matched photo finish against "search." You know a new business trend is serious when Google's owners treat it as an equal to the company's search-based lifeblood.
And that's why the cloud computing profits are going on the back burner for a while.
Not that there's anything wrong with that
Google Cloud is earning its keep already. In a quarter where every other segment showed shrinking revenues year over year or -- at best -- single-digit percentage growth, Google Cloud posted a 28% jump to $7.5 billion. That's 10.7% of Alphabet's total sales, up from 8.6% in the year-ago period.
This business picked up the top-line slack when the usual heroes struggled. Anything advertising-based -- from the Google search mainstay to YouTube ads -- is still sucking wind. The slowdown in digital ad sales is real, and it hasn't ended yet.
But that hasn't stopped customers from needing more cloud computing and edge computing services. The AI boom everyone is talking about fits neatly into that trend, as Google Cloud provides the number-crunching infrastructure for lots of established AI leaders and potential future favorites.
Words of wisdom from the C-suite
Still, Alphabet's management made it perfectly clear that growth-boosting investments are the top priority right now. The cloud operation's profits are nice, but the company won't fight hard to preserve them in the near future. But you don't have to take my word for it. Let's hear from the business leaders themselves.
"Cloud delivered profitability this quarter, and we remain focused on long-term value creation here," Pichai said. "We are the only cloud provider to announce the availability of Nvidia's (NVDA 6.18%) new L4 Tensor Core GPU with the launch of our G2 VMs, which are purpose-built for large inference AI workloads, such as generative AI."
In other words, Pichai (who has AI embedded in his name) doesn't mind making heavy investments in big-ticket AI hardware as long as the customers come knocking. The L4 core he mentioned, by the way, is reportedly 120 times faster at AI-powered video analysis than a general-purpose processor that costs more than $6,000 per chip. These trinkets aren't cheap, but Alphabet is happy to stack its data centers full of them.
CFO Ruth Porat poured more fuel on the AI fires:
"In terms of operating performance, we remain focused on driving long-term profitable growth in Cloud, while continuing to invest given the substantial opportunity," she said. "We will continue to invest to support long-term growth in particular, given the opportunities we see delivering AI capabilities to our customers."
AI is Alphabet's first, its last, its everything
So there you have it. Whatever it takes, Alphabet is turning billions of cash dollars into AI infrastructure rather than letting the surplus profits collect dust in the bank. I mean, preserving cash is really low on this company's to-do list at the moment -- Alphabet also doubled down on the $70 billion stock buyback authorization it issued a year ago.
This rolling stone won't gather any moss. Alphabet is reinvesting spare cash into the backbone and daily operation of business-boosting products and services. Google Cloud will surely turn a reliable profit someday, but I won't be shocked the next time that line item is printed in red ink again.
It's growth-oriented business management 101, folks. Alphabet is still running its business like a hungry little start-up, only on a much larger scale. Yes, you've heard that idea from another trillion-dollar company. That audacious ambition is just one more reason to own Amazon and Alphabet for the long haul.
