Alphabet (GOOG -2.32%) (GOOGL -2.21%) reported first-quarter earnings on Tuesday night and there was one question and investors' minds: How is the company faring as artificial intelligence (AI) takes center stage?
The answer: Good enough for now. The stock crept up 1.5% in after-hours trading in response to the better-than-expected numbers.
The Google parent's results were a far cry from the rapid growth the company has historically reported, but investors had dialed down their expectations since the digital ad market has weakened due to the slowdown in the macro economy.
Overall, Alphabet's revenue grew 3%, or 6% on a constant currency basis, to $69.8 billion, topping the consensus at $68.9 billion, while earnings per share fell from $1.23 to $1.17, though that topped estimates at $1.07.
The chart below shows how each of Alphabet's business segments performed.
As you can see from the chart, Google Cloud continued to put up strong growth, and even turned a profit, at $191 million, for the first time ever in part because it benefited from adjustments in the way the company allocates revenue in costs.
Alphabet also took a $2.6 billion charge related to the layoffs it announced in January, but posted a pre-tax gain of $988 million related to an extension in the useful life of its assets. A change in the timing of its share-based compensation also helped profits in the quarter.
Search holds its own
Despite Alphabet's diversification, Google Search makes up the majority of its revenue and profits and will continue to be the company's cash cow for the foreseeable future.
That's why the launch of OpenAI's ChatGPT and Microsoft's (MSFT -1.33%) ChatGPT-powered version of Bing set off alarm bells at Google HQ.
While it's still early in this new battle between Alphabet and Microsoft, the results from both companies don't give any indication that Bing has gained significant share in search.
Though Google Search revenue grew just 2% in the quarter to $40.3 billion, that was better than the company's two other advertising segments, YouTube ads and Google Network, both of which posted revenue declines, showing relative strength in search.
In recessionary environments, marketers tend to favor search ads since the return on investment is easy to track and search ads have a more direct payoff than, say, social media ads, which tend to be more about building brand awareness.
On the earnings call, Alphabet's management team fielded a number of questions about its plans to evolve search, including with its own Bard AI, which is designed to compete with ChatGPT, but was vague with most of its answers.
It's still unclear how much the company thinks it will have to spend to fend off the threat from Microsoft, what the changes to Google Search mean for its advertising model, or how users have been responding to the changes so far. Management did say that it now expects capital expenditures in 2023 to be modestly higher than last year due to a meaningful increase in "technical infrastructure," likely to beef up its AI capabilities.
Is Alphabet stock a buy now?
Based on the latest numbers, the search business doesn't seem at risk, but that isn't a reason to buy the stock. After all, though CEO Sundar Pichai is pitching the company as a winner from AI, in search, Alphabet still has much to lose and little to gain.
The company already has a highly lucrative monopoly in search with more than 90% market share globally, and it's resisted changing its search model for that reason.
The launch of ChatGPT has forced the company's hand, and in response, Alphabet scrambled to come up with a strategy, and it rushed to release Bard.
The numbers from Alphabet and Microsoft are a reminder that it's going to take years for this contest to play out as the possibilities of AI have only just started to reveal themselves.
For now, Alphabet stock looks safe, but the threat from Microsoft also puts a ceiling on the stock until it can reassure investors that search still has a defensible moat. That could be reason enough to look for buying opportunities elsewhere.
