Google stock popped early Wednesday after parent Alphabet reported third-quarter earnings and revenue that topped Wall Street targets as artificial-intelligence infused internet search showed signs of boosting the core advertising business.
Internet Search Ad Growth Stands Out
On the stock market today, Google stock climbed about 6.8% to 181.20 in early trading. Heading into the Google earnings report, shares were up 21% in 2024 but under-performed in the September quarter.
Additionally, internet search advertising came in at $49.39 billion, up 12%, topping Wall Street analyst estimates of 11.5% growth to $49.02 billion.
Ad search revenue also beat the "buy-side bogey" for Google stock, an analyst said. Mutual funds, hedge funds and institutional investors were looking for 12% to 13% ad search revenue growth, according to a Deutsche Bank report.
Further, Google's usage of generative artificial intelligence in internet search has been closely watched. Google began widely deploying AI Overviews in the U.S. in mid May, with conversational summaries topping links for many search queries. The AI Overviews system used Google's in-house Gemini model.
At JPMorgan, analyst Doug Anmuth in a report said Google's ad search business appears to be gaining momentum.
"AI Overviews are driving increased engagement and user satisfaction, partly through longer and more complex queries," Anmuth said. "Also, AI Overviews are monetizing at roughly the same rate as non-AI searches. We continue to believe GOOGL is being measured and methodical about how it rolls out AI-powered features. In addition to running ads above and below AI Overviews, Google is now showing search and shopping ads in AI Overviews for mobile users in the U.S."
2025 Capital Spending To Moderate?
Anmuth added: "We recognize longer-term questions will remain around AI search monetization and Google still needs to push AI Overviews into more commercial queries. But we're encouraged by the early rollout. More broadly in terms of AI, Google indicated that in 18 months it has reduced the cost of Gen AI queries 90% while doubling the size of its custom Gemini model."
Meanwhile, new chief financial officer Anat Ashkenazi signaled that capital spending could moderate in 2025.
In Q3, capital spending came in at $13.06 billion, ahead of consensus estimates of $12.66 billion.
"And as you think about the next quarter and going into next year, we will be investing in Q4 at approximately the same level of what we've invested in Q3, approximately $13 billion," she said on the earnings call with analysts. "And as we think into 2025, we do see an increase coming in 2025, and we will provide more color on that on the Q4 call, likely not the same percent step-up that we saw between 2023 and 2024, but additional increase."
Wall Street expects Google's 2024 capital spending to grow almost 60% to around $51 billion.
Based on Ashkenazi's comments, Bank of America increased its 2025 capital spending estimate to $59 billion, up about 15%.
However, the BofA report noted that Wall Street is also concerned about rising depreciation costs tied to capital spending as a drag on 2025 earnings.
In 2025, BofA estimates that depreciation costs will increase about 35% to $21 billion.
Cloud Computing, YouTube Results Beat
Reported after the market close on Tuesday, Google earnings came in at $2.12 per share, up 37% from a year earlier. The internet giant reports earnings under generally accepted accounting principles, also known as GAAP.
Further, gross revenue rose 15% to $88.3 billion. Analysts polled by FactSet had predicted Google earnings of $1.84 per share on revenue of $86.4 billion.
In addition, investors have been focused on operating expenses and margins as capital spending jumps amid investments in artificial intelligence. In Q2, operating margins rose to 32%, up from 28% a year earlier, topping estimates for 30.6%.
Meanwhile, Google posted YouTube ad revenue of $8.92 billion, slightly beating estimates of 12% growth to $8.88 billion.
Further, Google reported Q3 cloud computing revenue of $11.35 billion, above estimates of 29% growth to $10.88 billion.
Google Stock: Technical Ratings
Further, Alphabet repurchased $15.29 billion of Google stock in Q3, slightly less than the $15.68 billion in Q2.
Also, Google stock holds a Composite Rating of 91 out of a best-possible 99, according to IBD Stock Checkup. Google stock is among AI stocks to watch.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
