4 Key Takeaways from Google Parent Alphabet’s Financial Performance Call

After Google parent Alphabet (GOOGL) reported second-quarter results that beat analysts’ expectations, largely thanks to Google Cloud and search power, executives updated investors on the company’s investments in artificial intelligence (AI), prospects and more.

CEO Sundar Pichai says the risks of underinvesting in AI outweigh the fear of overinvesting

As big tech companies ramp up capital spending on AI investments, raising concerns about higher costs, Alphabet CEO Sundar Pichai said the “risk of underinvestment for us here is much greater than the risk of overinvestment.”

Pichai said that as the company over-invests in AI, its current investments in infrastructure solutions such as data centers could be used for other tasks as well.

The CEO added that the “lack of investment in staying ahead” of the AI ​​race “definitely has much bigger downsides” for Alphabet.

Increased Search Usage and User Satisfaction with AI Reviews

Pichai also added that the company is seeing “positive trends” from the implementation of its AI Overview tool, which summarizes content from searches at the top of the page.

The company saw an increase in search usage and user satisfaction, with an increase in engagement among younger users driven by AI reviews.

“AI reviews continue to provide people with valuable options to take action and engage with companies beyond AI reviews,” because “AI expands the types of queries (that Google can answer) and opens up new, powerful ways to search,” Pichai said.

Operating margins to rise in fiscal 2024, but could fall in third quarter

Alphabet Chief Financial Officer Ruth Porat told investors that while the company expects its operating margin to improve in full-year fiscal 2024 compared with 2023, the third quarter could be negatively impacted by depreciation and amortization charges and higher expenses, thanks in part to investments in artificial intelligence.

Reasons for the cost increase included increased expenses related to payment deadlines for Alphabet’s continued investment in artificial intelligence and the upcoming launch of Google Pixel.

Porat said Alphabet’s capital expenditures in the second quarter totaled $13 billion, and the company expects spending to be about $12 billion per quarter through the end of 2024.

The power of Google Cloud supported by AI offerings

Porat said generative AI solutions are “amplifying the potential of (cloud) businesses,” which has helped the company achieve better-than-expected results, with most of Google Cloud’s top 100 customers using Alphabet’s genAI solutions.

Google Cloud’s margin improved in the second quarter, which Porat said “reflects the revenue strength that (the cloud segment) is delivering and all of (the company’s) efficiency efforts.”

Alphabet said it will prioritize cost management by increasing spending on artificial intelligence investments.

Alphabet shares were down about 1.6% at $178.80 in the afternoon session at 6:40 p.m. ET on Tuesday after the results were announced.