Google stock fell Wednesday after parent Alphabet reported second-quarter earnings and revenue that topped consensus estimates. The internet search advertising business and cloud computing unit topped expectations but YouTube missed.
In addition, Google management signaled higher expenses in the September quarter, possibly curtailing margin growth.
At Evercore ISI, analyst Mark Mahaney said in a report: "The bar was high for Google this quarter and largely met — strong Search growth, operating margin upside and cloud growth acceleration." He added: "The YouTube miss was a negative, but this was largely due to tough (year-over-year) comparisons."
Reported after the market close on Tuesday, Google earnings came in at $1.89 per share, up 31% from a year earlier. The internet giant reports earnings under generally accepted accounting principles, also known as GAAP.
Further, gross revenue rose 14% to $84.74 billion. Analysts polled by FactSet had predicted Google earnings of $1.84 per share on revenue of $84.22 billion.
"Q2 results were not as convincing as in Q1, when beat was broader," said Jefferies analyst Brent Thill in a report.
Third Quarter Margin Outlook
In addition, investors have been focused on operating expenses and margins as capital spending jumps amid investments in artificial intelligence. In Q2, operating margins rose to 32% from 29% a year earlier, topping estimates for 31% operating margins.
On the stock market today, Google stock retreated 5% to close at 172.63. Shares initially rose more than 2% after the Q2 earnings release. Shares reversed down during the earnings call with Wall Street analysts. Management signaled higher expenses in the September quarter, possibly curtailing margin growth.
"Operating margins in the third quarter will reflect both the impact of the increase of depreciation expenses (tied to the higher level of capital investment) and the increase in cost of revenues due to the pull-forward of certain hardware launches into the quarter," said William Blair analyst Ralph Schackart, in a report.
At RBC Capital, analyst Brad Erickson said: "The after-hours reversal seemed largely attributable to management's Q3 margin commentary calling out expected impact from (AI-related) higher depreciation and the hardware launch pull-forward. Margin expansion is expected to continue, but with the buy-side looking for 2025 EPS above $9, this will likely temper that expectation slightly."
Heading into the Google earnings report, shares were up 32% in 2024.
Google Capital Spending Higher
Additionally, search advertising came in at $48.51 billion, topping estimates of 12% growth to $47.71 billion.
Meanwhile, Google posted YouTube ad revenue of $8.66 billion, missing estimates of 16% growth to $8.93 billion.
"YouTube ad growth was 3.5% below expectations," said Wedbush analyst Daniel Ives in a report. "We expect the trajectory of near-term growth in the segment will become an area of investor debate. (YouTube's performance) may be reflective of a more competitive environment in the category, given the increase in internet TV/long-form video advertising inventory over the past several quarters."
Further, Google reported Q2 cloud-computing revenue of $10.35 billion, above estimates of 27% growth to $10.22 billion.
Also in Q2, capital spending came in at $13.19 billion, slightly ahead of consensus estimates of $12.3 billion, and higher than Q1 spending of $12 billion.
Further, Google stock buybacks reached a near record $15.68 billion in Q2, topping the $14.97 billion spent in Q1.
Bigger Waymo Spending On The Way
Also, Chief Financial Officer Ruth Porat said Alphabet would hike capital spending on self-driving automotive business Waymo. Porat said Alphabet will spend at least $5 billion more on the Waymo project.
Tekedra Mawakana, co-CEO of Waymo, said on Elon Musk's X social media platform: "Alphabet has committed up to $5 billion to Waymo. We are grateful for their immense vote of confidence in our team and recognizing the amazing progress we've made with our technology, product and commercialization efforts."
"The $5 billion Waymo is a multi-year investment," said Angelo Zino, analyst at CFRA Research, in an email. "We think it is warranted given prospects for autonomous driving capabilities and when spread over multiple years is just a drop in the bucket." He noted Google may reach $50 billion in 2024 capital spending.
Meanwhile, Porat will assume a newly-created role of president and chief investment officer. Part of Porat's new role involves oversight of Alphabet's "Other Bets" such as Waymo.
What's more, Google's new chief financial officer, Anat Ashkenazi, starts July 31.
Google Stock Tumbles
Google stock fell 5.1% to 172.57 in afternoon trading Wednesday. Shares gapped below their 50-day line in heavy volume.
Also, Google stock holds a Composite Rating of 98 out of a best-possible 99, according to IBD Stock Checkup.
Google is among AI stocks to watch.
Google AI Overviews Impact
The impact of generative AI on Google's core internet search advertising business remains a key issue. Google has embedded its Gemini AI model tools and chatbot AI technology into its search engine.
Google began widely deploying AI Overviews in the U.S. in mid May, with conversational summaries topping links for many search queries. Also, Google plans to expand AI Overview's availability globally to 1 billion users by year end.
"Following the introduction of AI Overviews into U.S. search, management noted increased usage and satisfaction among users, namely for 18 to 24-year olds," said TD Cowen analyst John Blackledge in a report.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
