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Google cements its advertising dominance with strong Q3 results

The news: Google parent Alphabet Inc.'s Q3 financial results provide a positive outlook for the company, marking its strongest advertising revenue growth in five quarters.

The results: Overall revenues were $76.7 billion in Q3 2023, up 11% year over year (YoY) from $69.1 billion. That represented an acceleration from the 6% revenue growth reported for Q3 2022.

  • Operating income increased from $17.1 billion in Q3 2022 to $21.3 billion in Q3 2023, with operating margin expanding from 25% to 28%.
  • Third-quarter net income rose to $19.7 billion from $13.9 billion the prior year.
  • Google Search and Other: This segment remains the primary revenue driver, rising from $39.54 billion a year earlier to $44.03 billion. Collectively, advertising revenues rose from $54.5 billion to $59.65 billion—the highest total in that category in nine quarters.
  • The company improved its results with 2.3% fewer employees than a year ago (186,779 to 182,381). During the earnings call, CFO Ruth Porat said headcount growth is being restrained to prioritize key products and reallocate talent.

Yes, but: There was sizable growth in Google Cloud revenues, which jumped from $6.87 billion to $8.41 billion YoY, showing the company's growing foothold in that market.

  • Though that 22.5% growth rate sounds impressive, six quarters ago it was 43.8%—a slowdown that investors notice.
  • Consequently, Alphabet shares slumped 8% in early Wednesday trading as a result of the Cloud slowdown despite advertising's strong growth.

The role of AI: Executives told analysts that the company’s investments in AI are helping advertisers.

  • Performance Max, an AI-powered goal-based campaign type, is providing excellent ROI for advertisers, with users achieving an average of over 18% more conversions.
  • Nearly 80% of advertisers are using at least one AI-powered search ad product.
  • AI tools such as Dreamscreen and YouTube Create are revolutionizing content creation, Alphabet chief Sundar Pichai said.
  • The company also called out Spotlight Moments, launched last week, which uses AI to identify trending content for brand sponsorship.

Area to watch: YouTube ad revenues increased to $7.95 billion, above the $7.8 billion analysts expected.

  • Pichai highlighted that Shorts, YouTube’s TikTok-style format, now boasts a staggering 70 billion daily views, a significant increase from around 50 billion daily views at the start of the year.

Our take: Alphabet showed robust performance in Q3 2023 with notable growth in key financial metrics—which will give it the war chest to innovate at a time when tech is moving quickly.

  • Pichai’s comments about AI-driven innovations and Porat's mention of the "fundamental strength" of the business reinforce the company's strong market position, signaling promising prospects for the current quarter.