Shares of Alphabet (GOOGL 1.08%) (GOOG 1.06%) turned sharply lower on Wednesday, falling as much as 9.7%. As of 11:44 a.m. ET, the stock was still down 8.9%.
The catalyst that sent the tech giant lower was its third-quarter earnings report, as strong ad revenue was offset by weakness in its cloud computing business.
It's all about the cloud
Alphabet generated revenue of $76.7 billion, up 11% year over year, as its online advertising business continued the gradual recovery from its downturn-induced slump. The bottom line also got a boost as diluted earnings per share (EPS) of $1.55 jumped 46%.
To give some context to the numbers, analysts' consensus estimates were calling for revenue of $75.9 billion and EPS of $1.45, so Alphabet sailed past both measures by a comfortable margin.
Google's advertising business, which represents the lion's share of Alphabet's revenue, grew 9% year over year to $59.6 billion, highlighting the continuing recovery in online ads.
While the news was mostly good, myopic investors focused on a single segment of Alphabet's business -- namely Google Cloud -- and did not like what they saw. The cloud segment generated revenue of $8.4 billion, up 22% year over year, marking its slowest rate of growth since early 2021. Analysts' consensus estimates were calling for cloud growth of $8.6 billion, so investors were left wanting.
During the earnings call, CFO Ruth Porat blamed the tepid growth on "customer optimization efforts" -- industry parlance for cost-cutting -- a continuing refrain in recent quarters, though she didn't provide any additional context. Wall Street read that as suggesting that its artificial intelligence (AI) cloud offerings had yet to attract a sizable audience. This was in stark contrast to Microsoft, whose cloud growth accelerated during the quarter, driven by strong demand for AI.
Here's why Alphabet stock is a buy
CEO Sundar Pichai tried to put the best spin on the issue, saying, "We're continuing to focus on making AI more helpful for everyone; there's exciting progress and lots more to come." Given the continued slowing of its cloud business, investors are taking a wait-and-see approach.
It's still early in the AI revolution and investors should take a longer view. Furthermore, given the company's domination of search and online advertising, Alphabet stock is a steal at just 22 times forward earnings.
