By Max A. Cherney and Akash Sriram
(Reuters) -Google-parent Alphabet (NASDAQ:GOOGL)'s cloud business crawled to its slowest in at least 11 quarters, sending the company's stock down 5.7% after hours, even as sales at rival Microsoft (NASDAQ:MSFT)'s cloud unit boomed.
The drop in Google’s share price despite beating Wall Street estimates for profit and sales, shows how much investors want the company to deliver gains in artificial intelligence, and show the cloud business remains competitive against a more powerful Azure from Microsoft and Amazon (NASDAQ:AMZN).com’s AWS.
Fears of a slowing global economy have prompted companies to curb spending on cloud-related services, including expensive AI tools, which has slowed revenue growth at Google's cloud unit to 22.5% in the third quarter, from 28% in the prior three-month period.
Google Cloud third-quarter revenue rose 22.5% to $8.41 billion, the slowest growth since at least the first quarter of 2021. The cloud unit reported a operating income of $266 million, compared with an operating loss of $440 million a year ago. Wall Street expected cloud computing revenue of $8.62 billion.
Finance chief Ruth Porat said in a conference call Tuesday that the third-quarter cloud growth is due to "customer optimization efforts," without elaborating.
By contrast, revenue from Microsoft's Intelligent Cloud unit, which houses the Azure cloud computing platform, grew to $24.3 billion, compared with analysts' estimate of $23.49 billion, LSEG data showed. Azure revenue rose 29%, higher than a 26.2% growth estimate from market research firm Visible Alpha. Microsoft shares rose 5% after hours.
"Despite Alphabet topping quarterly earnings and revenue estimates, investors were disappointed by the relatively weak performance at its Google cloud platform, which is at risk of falling further behind Azure and AWS," Investing.com senior analyst Jesse Cohen.
While advertising spending has been strong in some sectors such as retail and travel, industry executives and analysts have noted a pullback in budgets in some areas, affecting Alphabet's major source of revenue.
The company recorded ad revenue of $59.65 billion in the third quarter, compared with $54.48 billion a year earlier. Analysts on average had expected $59.12 billion in revenue from its advertising business. Within the company's advertising segment, YouTube ads reported revenue of $7.95 billion compared with $7.07 billion last year.
Alphabet reported a net profit of $19.69 billion for the July-Sept. period, compared with $13.91 billion a year earlier.
Revenue for the quarter ended Sept. 30 stood at $76.69 billion, compared with estimates of $75.97 billion, according to LSEG data.
Google said it spent $8.06 billion on capital expenses in the third quarter that was “overwhelmingly” the result of investments in its technical infrastructure. Servers were the largest component, followed by data centers due to a significant increase in AI computing investments, Porat said.
Alphabet laid off roughly than 12,000 employees earlier this year, or about 6% of its global workforce, in an effort to cut staff amid a "different economic reality." The company also laid off employees from its global recruiting team in September.
The company disclosed that it recorded severance and related charges of $2.1 billion for the first nine months of the year.