Alphabet (GOOG -4%) saw a decline following its Q2 results. Despite reporting its sixth consecutive EPS beat, the upside was smaller than in Q1. Revenue rose 13.6% year-over-year to $84.74 billion, slightly exceeding analyst expectations. Operating margin improved to 32% from 29% in the same period last year.
- Google Advertising revenue increased by 11.1% year-over-year to $64.62 billion. Concerns linger about the impact of generative AI on its search business. Google Search revenue grew 13.8% year-over-year to $48.51 billion, YouTube ads revenue rose 13% to $8.66 billion, falling short of street estimates, and Google Network revenue declined by 5.2% to $7.44 billion.
- YouTube saw healthy watch time growth, narrowing the monetization gap in Shorts, and gained momentum in connected TV. However, there was a sequential decline in year-over-year growth for YouTube subscriptions due to a price increase for YouTubeTV last year. This impact will continue through the rest of the year.
- Alphabet highlighted its AI enhancements, improving responses on more types of Search queries and introducing new Search methods. Positive trends are emerging from AI testing, especially among users aged 18 to 24. Over 1.5 million developers are now using its Gemini AI platform.
- Google Cloud was a standout, with revenue jumping 28.8% year-over-year to $10.35 billion, surpassing the $10 billion mark for the first time and achieving over $1 billion in quarterly operating profit. The company continues to attract major brands like Hitachi, Motorola Mobility, and KPMG, and has expanded its partnership with Oracle.
- Headcount declined sequentially in Q2 due to company actions and slower hiring. Alphabet expects a slight increase in headcount in Q3, focusing on top engineering and technical talent, particularly in Cloud and technical infrastructure. This is expected to impact Q3 operating margin along with hardware launches being pulled forward into Q3.
Overall, the stock's decline is due to slower advertising growth compared to Q1, a shortfall in YouTube revenue, and high pre-report sentiment. The stock had risen from the low $130s in early March to around $184 at yesterday's close. Concerns about search revenue and AI competitors contributed to the pullback.
