Alphabet Inc. (tickers: GOOG, GOOGL), the parent company of Google, reported its third-quarter earnings on Wednesday, surpassing Wall Street expectations for both revenue and profit, driven by a series of AI-related partnerships in its cloud division. Following the announcement, the company's shares surged over 7.6% in pre-market trading.
For the three months ending September 30, Alphabet posted quarterly revenue of $102.4 billion. According to Bloomberg-tracked data, this figure not only exceeded analysts' expectations of $99.85 billion but also showed growth from $88.3 billion in the same period last year.
The revenue growth was primarily fueled by Google Cloud, which saw a 34% year-over-year increase, rising from $11.4 billion to $15.2 billion—also surpassing the anticipated $14.8 billion. Additionally, Google Cloud's backlog (representing potential future revenue from customer contracts) climbed to $155 billion in Q3.
During the earnings call, company executives attributed Google Cloud's growth to corporate demand for AI, with AI contributing "billions of dollars" to the cloud division's revenue this quarter.
"By the end of Q3, the number of partnerships we’ve signed worth over $1 billion has already surpassed the total from the past two years combined," Alphabet CEO Sundar Pichai told investors in the Wednesday afternoon call, referring to the cloud business.
Meanwhile, the tech giant reported adjusted earnings per share (EPS) of $2.87 for Q3, beating both the expected $2.27 and the year-ago adjusted EPS of $2.12.
Alphabet also raised its full-year capital expenditure forecast, increasing the midpoint from $85 billion to $92 billion. CFO Anat Ashkenazi stated that the additional spending would go toward AI infrastructure, emphasizing that demand for AI technology currently outstrips supply.
With its Gemini AI model gaining traction and major AI developers signing up for its cloud services, Alphabet has increasingly positioned itself as a key beneficiary of the AI boom.
In July, OpenAI added Google to its cloud infrastructure provider list. By late August, reports indicated that Meta had signed a $10 billion cloud services deal with Google Cloud to secure AI computing resources. Shortly after Q3 ended, OpenAI rival Anthropic announced an agreement to use up to 1 million of Google’s custom AI chips (TPUs). Bank of America estimates this deal could generate up to $10 billion in annual revenue for Alphabet.
However, AI-powered chatbots like OpenAI’s ChatGPT pose a growing threat to Alphabet’s core search business. Last week, OpenAI launched ChatGPT Atlas, a web browser, intensifying competition with Google and briefly causing Alphabet’s stock to dip.
"Whether Google can maintain its dominance in search remains a key structural uncertainty," Loop Capital analyst Rob Sanderson wrote in an October 23 note to investors.
Bloomberg data shows Google’s search revenue for Q3 reached $56.6 billion, exceeding expectations of $55 billion.
Alphabet executives noted on Wednesday that AI is driving higher search query volumes and contributing to the segment’s growth.
"We are in a critical phase of business expansion," Pichai said.