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- Investors reacted negatively to Google parent Alphabet’s Q3 results due mainly to a slowdown in growth in its Cloud division. Its 22% year-on-year growth lagged that of industry heavyweight Azure, suggesting the latter’s rapid integration of generative AI into its offerings was paying off.
- But Cloud only brings in about 10% of Alphabet’s revenue. And the company’s main driver of results, advertising online, continues to perform very well with revenue growth accelerating to 10.7% in the quarter.
- Accelerating sales growth and continued cost control efforts are leading to further gains in profitability with operating margins rising to 27.8% during the three months to September 30.
- Pleasingly, YouTube pulled out of its post-ATT changes rut with advertising sales rising 12.5%, suggesting managers have finally adapted to the new rules at Apple.
- The slowdown in Cloud growth is a worry, CEO Sundar Pichai very much needs to accelerate the rollout of AI research into actual products, and threats from regulators bear keeping a very close eye on.
- But we shouldn’t lose sight of the dominant position Alphabet holds in online advertising, the huge cash flow it pumps out quarter after quarter, and current valuation of 24 times trailing earnings that we believe warrant taking a closer look at the group this month.