In the face of DeepSeek's impact, Google is heavily investing in AI! Google's Q4 cloud revenue is disappointing, and this year's capital expenditure guidance unexpectedly exceeds expectations | Earnings report insights
In the fourth quarter, Google's total revenue grew by 12% year-on-year, marking the lowest growth rate in over a year. Google Cloud revenue increased by 30%, both exceeding expectations but showing a slowdown. Digital advertising revenue grew by 11%, and search revenue increased by 13%, both higher than expected. Capital expenditures in the fourth quarter rose by 30%, 8% higher than expected, with projected spending of $75 billion this year, nearly 30% above expectations and over 40% higher than last year. The stock price fell by more than 9% in after-hours trading. Updates to follow
In the last quarter of last year, Google's search, advertising, and YouTube video services all performed better than expected. However, the cloud business, which directly benefits from the application of artificial intelligence (AI) technology amid significant increases in spending, fell short of Wall Street expectations, leading to the parent company Alphabet's total revenue for the quarter being below expectations.
Google has also decided to invest more heavily this year, with annual capital expenditure guidance related to data centers and AI infrastructure far exceeding Wall Street expectations. Commentators noted that Google's massive investment in AI has yet to yield excess returns, and with the rapid rise of the Chinese AI newcomer DeepSeek, which launches high-performance models at ultra-low costs, investors may increasingly question whether such investments by Google are justified.
On February 4th, Eastern Time, after the U.S. stock market closed, Alphabet announced its financial data for the fourth quarter (hereinafter referred to as Q4) and the full year ending December 31, 2024, with the previous quarter referred to as Q3.
1) Key Financial Data
Revenue: Q4 operating revenue was approximately $96.47 billion, a year-on-year increase of 11.8%, while analysts expected $96.62 billion. Q3 saw a year-on-year growth of 15.1%, and full-year revenue was $350.02 billion, an increase of 13.9% from the previous year.
EPS: Q4 diluted earnings per share (EPS) was $2.15, a year-on-year increase of 31.1%, while analysts expected $2.13. Q3 saw a year-on-year growth of 36.8%, and full-year EPS was $8.04, an increase of 38.6% from the previous year.
Operating Profit: Q4 operating profit was approximately $30.97 billion, a year-on-year increase of 83.2%, while analysts expected $30.72 billion. Q3 saw a year-on-year growth of 33.6%; Q4 operating profit margin was 32%, up 5 percentage points year-on-year, while analysts expected 31.9%. Q3 saw a year-on-year increase of 4 percentage points to 32%, and the full-year operating profit margin was 32%, up 5 percentage points from the previous year.
Net Profit: Q4 net profit was $26.54 billion, a year-on-year increase of 28.3%, while Q3 saw a year-on-year growth of 33.6%. Full-year net profit was $100.12 billion, an increase of 35.7% from the previous year.
Capital Expenditure: Q4 capital expenditure was $14.28 billion, a year-on-year increase of 29.6% and a quarter-on-quarter increase of 9.3%, while analysts expected $13.21 billion. Q3 saw a year-on-year increase of 63.7% and a quarter-on-quarter decrease of nearly 1% to $13.06 billion, with full-year capital expenditure approximately $52.54 billion.
2) Segment Business Data
Advertising: Q4 revenue from Google's advertising business was approximately $72.46 billion, a year-on-year increase of 10.6%, while analysts expected $71.73 billion. Q3 saw a year-on-year growth of 10.4%; among them, Q4 YouTube advertising revenue was $10.47 billion, a year-on-year increase of 13.8%, while analysts expected $10.22 billion. Q3 saw a year-on-year growth of 12.2%; Q4 revenue from Google’s network business, including AdSense, was $7.95 billion, a year-on-year decrease of 4.1%, while analysts expected $8.14 billion. Q3 saw a year-on-year decrease of 1.6%
Search: In Google's advertising business, revenue from Google Search and other businesses in the fourth quarter was $54.03 billion, a year-on-year increase of 12.5%, exceeding analysts' expectations of $53.29 billion, with a year-on-year growth of 12.2% in the third quarter.
Google Cloud: In the fourth quarter, Google Cloud revenue was $11.96 billion, a year-on-year increase of approximately 30%, below analysts' expectations of $12.19 billion, with a year-on-year growth of approximately 35% in the third quarter; Google Cloud's operating profit was approximately $2.09 billion, a year-on-year increase of 142.2%, exceeding analysts' expectations of $2.04 billion, with a year-on-year growth of 632% in the third quarter.
Subscriptions, Platforms, and Devices: In the fourth quarter, revenue from Google's subscriptions, platforms, and devices, including the Play Store, was $11.63 billion, a year-on-year increase of 7.8%, below analysts' expectations of $12.03 billion, with a year-on-year growth of 27.8% in the third quarter.
Other Bets: In the fourth quarter, revenue from other bets, including the autonomous driving company Waymo, was $400 million, a year-on-year decrease of 39.1%, below analysts' expectations of $591.9 million, with a year-on-year growth of 30.6% in the third quarter; in the third quarter, other bets reported an operating loss of $1.17 billion, a year-on-year increase of 36%, exceeding analysts' expectations of a loss of $1.21 billion, with a year-on-year loss narrowing by 6.5% to $1.12 billion in the third quarter.
TAC: In the fourth quarter, the traffic acquisition cost (TAC) paid to partners was $14.85 billion, a year-on-year increase of 6.2%, with a year-on-year growth of 8.5% in the third quarter.
After the earnings report was released, Alphabet's stock price rose 2.5% but then plummeted, falling more than 9% at one point in after-hours trading.
Total Revenue and Google Cloud Growth Slower than Expected; Digital Advertising and Search Revenue Exceeds Expectations
The earnings report shows that in the fourth quarter, Google's revenue and EPS growth both slowed compared to the third quarter, with revenue growth being the lowest since the third quarter of 2023, but revenue fell short of expectations while EPS exceeded expectations. In other words, the slowdown in revenue growth to about 12% exceeded analysts' expectations, while the slowdown in EPS was not as significant as anticipated.
Last week, Meta reported fourth-quarter revenue exceeding expectations, reaching a record high for a single quarter, with digital advertising business surging over 20%. As a digital advertising giant, Google also maintained double-digit growth in the fourth quarter, with a growth rate of nearly 11%, slightly faster than the approximately 10% in the third quarter, contrary to analysts' expectations of a slowdown to about 9.5%.
In the advertising business, revenue from Google Search and YouTube ads in the fourth quarter also grew faster than in the third quarter, contrary to analysts' expectations of a slowdown. Philipp Schindler, Senior Vice President responsible for Google and YouTube sales activities, stated that last year's U.S. election advertising revenue drove sales growth for YouTubeGoogle Cloud has become a prominent "blunder" in Google's and Alphabet's main businesses in the fourth quarter. The cloud revenue for the quarter grew by 30% year-on-year, slowing from 35% in the third quarter, while analysts expected the growth rate to slow to nearly 33%.
Google's management is optimistic about the cloud demand created by AI applications. Alphabet and Google CEO Sundar Pichai stated in the earnings announcement that the AI-driven Google Cloud product portfolio is experiencing stronger customer demand, and YouTube continues to lead in streaming watch time and podcasts. In 2024, the annualized revenue of Google Cloud and YouTube is expected to reach $110 billion.
Pichai mentioned during the earnings call that the usage of Google's large model Gemini reached 4.4 million developers in six months. Younger users are embracing AI in their searches. Google has some of the most effective AI models.
Fourth-quarter capital expenditures were 8% higher than expected, with this year's expenditure guidance nearly 30% higher than expected
In the fourth quarter, Alphabet's capital expenditures grew nearly 30% year-on-year, slowing from the growth in the third quarter, but exceeding analysts' expected expenditure levels by more than 8%.
What surprised the market even more was Pichai's announcement that the company expects to invest $75 billion in capital expenditures in 2025. This means that Alphabet's capital expenditures this year will surge by over 42.7% compared to last year, nearly 30% higher than analysts' expectations. Analysts had estimated expenditures of only $57.9 billion, which represents a 10.2% increase from last year.
Commentators noted that Google has been under pressure, and investors hope to see how Google's massive investments in AI translate into tangible business results. Recently, DeepSeek has gained popularity online with its cost-effective models and AI services, topping the global app download charts. Following DeepSeek's breakthrough, the pressure from investors may intensify.
Pichai commented during the earnings call that DeepSeek has a "strong team."