Google shows it can prevail despite AI threats as cloud business booms

Alphabet has faced a lot of noise this year around the health of its core search business, due to a slumping digital ad market and the longer-term potential for artificial intelligence chatbots to take traffic.

In its second-quarter earnings report on Tuesday, the company showed it has any numbers of ways to succeed despite those very real challenges.

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Google’s revenue rose 7% to $74.6 billion from $69.7 billion in the year-earlier period, topping analysts’ estimates. Profit was also better than expected, driving the stock price up about 6% in extended trading.

Online advertising, which has been a difficult market for the past year, remains slow because of economic concerns and corporate cost cutting. Google’s ad revenue only increased 3.3% from a year earlier, but that’s an improvement from the first quarter, when ad revenue fell. Snap’s second-quarter report was more troublesome, as the company issued a disappointing forecast, sending the stock down almost 20%.

“If you step back, you’re seeing real weakness in linear TV, ad agencies, smaller digital companies,” said Michael Nathanson, an analyst at Moffett Nathanson, on Alphabet’s investor call following the results. “Yet you guys have accelerated your growth this quarter.”

Search revenue, which makes up the majority of Google’s ad business, also saw steady growth. That’s a relief to investors, some of whom have grown concerned that traditional search users will be moving to generative AI chatbots from OpenAI and Microsoft, the startup’s main investor, for their online queries.

Microsoft’s Bing search engine integrated OpenAI’s ChatGPT early this year. However, Google’s search business still expanded, and CEO Sundar Pichai pointed to the company’s homegrown chatbot called Bard, which has been a major focus of investment in recent months.

Executives on Tuesday sounded as if there’s no where to go but up. They made dozens of references to AI on the call, trying to reassure investors that the technology is being used across the company, though Google has yet to say when its search feature, Search Generative Experience (SGE), will be widely available to the public. The company has said SGE will be able to synthesize search results from complex queries.  

Overall, AI is a boon, Pichai said.

“Over time, this will just be how search works,” he said, pointing to different search options the company is working on for users. “It really gives us a chance to now not always be constrained in the way search was working before. It allows us to think outside the box. We are ahead of where I thought we’d be at this point in time.”

Pichai gave an example of the company’s plans to automate some customer service for its products using new AI models.

But where Google can benefit no matter what happens in the ad market is on the cloud infrastructure side, where it competes with Amazon Web Services and Microsoft Azure. AI companies are flocking to Google’s cloud technology so they can run the compute-heavy projects that are only available in a few places.

Google’s cloud business, which turned profitable in the first quarter, saw revenue increase 28% in the second quarter to $8 billion, topping analysts’ estimates. Pichai said that more than 70% of so-called unicorns (generally defined as billion-dollar tech startups) in generative AI are Google Cloud customers. They include Cohere, Japser and Typeface.

“There is definitely a lot of interest from customers on AI and they definitely are engaging on many more conversations with us,” Pichai said.

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