Google's AI Future: Investor Skepticism Amidst Q2 2024 Earnings Call

The 5 questions Google couldn't answer on it's earnings call about its AI future

Join our daily and weekly newsletters for the latest updates and exclusive content on industry-leading AI coverage. Learn More Google's carefully crafted image as an AI pioneer is cracking under Wall Street's scrutiny. In yesterday's earnings call, analysts relentlessly probed Alphabet executives, exposing a growing belief that the tech giant is losing its grip on the AI revolution it helped start. The tense exchange revealed a stark reality: Google's cautious approach to AI deployment has backfired. While competitors race ahead with flashy chatbots and generative tools, Google's measured steps are increasingly viewed as missteps. SVP and Chief Business Officer Philipp Schindler's insistence that "We've been the leader in AI for many, many years" rang hollow against a backdrop of recent public fumbles and delayed product launches. Strong results in Google Cloud This quarter's results showed continued acceleration in Google's Cloud segment, with both revenue and profitability reaching new highs in Q2 2024. The consistent growth in revenue, improving margins and steady adoption of AI technologies indicate that Google's investments in cloud and AI are yielding increasingly positive results. Key observations for Q2 2024: On the earnings call, analysts peppered Alphabet executives with pointed questions about the company's AI initiatives, from the rollout of its Search Generative Experience to the recent stumbles with Gemini's image generation. The intense scrutiny underscored a growing anxiety that Google, long considered a pioneer in AI research, might be ceding ground to more aggressive competitors. The call exposed five critical questions that Google executives struggled to answer convincingly: These questions highlight the growing uncertainty (and investor impatience) surrounding Google's AI strategy and its ability to maintain its market leadership. Tech giant struggles to adapt in new AI landscape Google's leadership finds itself in unfamiliar territory, facing a level of intense competition the company hasn't experienced since its early days. The rise of OpenAI, backed by Microsoft's deep pockets and aggressive AI integration across its product line, has caught Google off guard. This new landscape exposes the limitations of Google's once-vaunted company culture. The "launch and iterate" ethos that served Google well in the past now seems to be a liability. While laudable, executives' repeated emphasis on responsible AI development and quality control betrays a risk-averse mindset ill-suited to the current AI arms race. Google's deliberate pace, once a hallmark of its thoughtful approach to innovation, now appears as organizational inertia. The company's decentralized structure and emphasis on consensus-building, which fostered creativity in more stable times, may now be hampering its ability to make swift, decisive moves in a rapidly evolving AI landscape. As analysts' probing questions revealed, Google's cherished culture might be its biggest obstacle in adapting to this new, hypercompetitive era of AI development. The contrasting narratives from Google, Amazon and Microsoft reveal a shifting landscape in the cloud and AI sectors, with significant implications for the tech giants' competitive positions. For Microsoft, Google's struggles in AI deployment and monetization underscore the wisdom of its aggressive AI strategy. Microsoft's early and deep partnership with OpenAI, coupled with its rapid integration of AI across its product suite, appears to be paying dividends. The 7-point contribution of AI to Azure's growth starkly contrasts with Google Cloud's more measured progress. Microsoft's ability to attract 65% of Fortune 500 companies to its Azure OpenAI services suggests it's capturing the enterprise AI market more effectively than Google, potentially widening its lead in the cloud space. Amazon's accelerating AWS growth rate, jumping from 13.2% to 17.2% year-over-year, coupled with its "multibillion-dollar revenue run rate" in AI services, paints a picture of a company successfully navigating the transition from cost optimization to AI-driven innovation. Amazon's narrative of being the "preferred partner" for companies adopting generative AI technologies suggests it may be outmaneuvering Google in capturing new AI-driven cloud workloads. The implications are clear: While Google grapples with balancing responsible AI development and market demands, Microsoft and Amazon are capitalizing on the AI boom more effectively. Microsoft's integrated approach across infrastructure, services, and applications appears to be resonating strongly with enterprise customers, potentially pressuring Google's position in both cloud and productivity tools. Meanwhile, Amazon's ability to transition customers from cost-saving to AI adoption could be eroding Google Cloud's growth potential in the enterprise segment. Google's strong cloud growth signals tailwinds for AWS and Azure Google's latest earnings call has left Wall Street analysts with more questions than answers about the tech giant's AI strategy. Despite CEO Sundar Pichai's assertions of AI leadership, the company's vague responses and lack of concrete plans across key areas are raising red flags. From unclear innovation timelines to fuzzy monetization strategies, Google seems to be struggling to articulate a compelling vision for its AI future. Google Cloud's strong results hint at an even bigger windfall for AWS and Azure. As companies rush to adopt AI, cloud spending is surging across the board. But Google's rivals may be cashing in more effectively. Microsoft's tight partnership with OpenAI and Amazon's growing appeal to AI-hungry businesses could lead to standout performances when they report earnings. If so, Google's position in the lucrative enterprise AI market may weaken further, despite its own growth. The absence of specific solutions to recent product reliability issues, coupled with a lack of clear ROI targets for their substantial AI investments, paints a picture of a company potentially losing its footing in a rapidly evolving landscape. Perhaps most concerning is Google's apparent lack of a robust strategy to counter Microsoft's aggressive moves in the enterprise AI space. These dynamics suggest that unless Google can accelerate its AI deployment and more effectively communicate its value proposition, it risks falling further behind in the cloud and AI race. The pressure is now on Google to translate its deep AI research capabilities into market-ready products and services that can match or exceed the momentum of its competitors.

Investors aren't buying Google's AI future - yet

The key numbers: Alphabet booked revenue of $US85 billion ($129 billion), which was up 14 per cent year-on-year. Revenue for its cloud division - which trails Microsoft's Azure and Amazon Web Services - exceeded $US10 billion in a quarter for the first time. It made $US23.6 billion net income, or $US1.89 per share, a 29 per cent increase from the same time last year. The impact of AI on search is an existential threat to Alphabet, and its reaction to it is an existential threat to the broader internet economy. In most parts of the world, apart from Australia, Alphabet has been trialling ChatGPT-style AI summaries in search results, leading publishers around the world to fear their content will be plundered, and traffic will plunge as readers have no need to click through to the source material. Pichai asserted that all was fine on both counts, saying he was pleased to see positive trends from its AI testing, including (unquantified) increases in search usage and (again unquantified) increased user engagement. "People who are looking for help with complex topics are engaging more and keep coming back for AI overviews. We see even higher engagement from younger users aged 18 to 24 when they use search with AI overviews," he said. "We are continuing to prioritise approaches that send traffic to sites across the web, and we are seeing that ads appearing either above or below AI overviews continue to provide valuable options for people to take action and connect with businesses." Could they back up the hype? Asked by Morgan Stanley's Brian Nowak to give more detail (or proof) that this was true with click-through rates and monetisation levels, Pichai prevaricated, saying the rollout would expand globally soon, and threw to his chief business officer, Philipp Schindler. "Yeah, look, innovation and improvements to the user experience on search have historically opened up many opportunities for advertisers," Schindler began before saying that advertisers would soon be able to test adding shopping and advertising links to AI overviews. In other words, Alphabet can't back up its search claims yet. Goldman Sachs' Eric Sheridan then tried to push for specifics about how its AI products are getting adopted and implemented, and what it could mean for the workload (and revenue) for its cloud business "Obviously, it's something which, I think, will be a big driver over time ... we are definitely seeing traction," Pichai said. "People are deeply engaging with the Gemini models across [AI development platform] Vertex and AI Studio, we now have over two million developers playing around with these things. And you're definitely seeing early use cases. "But we are in this phase where we have to deeply work and make sure these use cases are driving deeper progress and unlocking value, which I'm very bullish will happen ... But these things take time." So, again, it was "watch this space". Market reaction: Investors had been expecting $US1.84 in earnings-per-share, but the beat didn't stop stock falling by about 2 per cent in after-market trading. Leading tech market analysts saw the positive signs in the numbers while calling out the lack of certainty that Alphabet's market supremacy in search can continue in the AI era, or if it will make a meaningful dent in the market share of its cloud rivals. "The cloud race is just beginning between Google, Microsoft, and Amazon with the AI Revolution on the doorstep in this 1995 moment," Wedbush analyst Dan Ives posted on X after the earnings call. "The Google cloud and AI story is following the golden path of Microsoft and the Street is still underestimating this tech spending wave in our view." Deepwater Asset Management's Gene Munster, meanwhile, said Alphabet had talked a lot about AI in its earnings call, without really adding much new. Its main story in the cloud and AI era remained intact, he said, and Alphabet's infrastructure investments showed it was positively building for the future. "I expect analyst expectations for Google to be for them to grow CapEx between 50-55 per cent, up from the previous expectations of 45 per cent," Munster wrote. "Ultimately, I believe they'll grow CapEx at more than 70 per cent because if they don't, they run the risk of losing their grip on the future." The Breakdown's take: The lukewarm reaction to Alphabet's AI claims could be seen as a sign that it has somewhat bungled its attempts to position itself at the forefront of the new era until now. Its Gemini generative AI products were originally called Bard, but had a swift rebrand after early public failures, such as serving up fake information in its official launch (in the face of pressure to keep up with OpenAI). It was also caught faking Gemini's capabilities in a product launch last December, and it then suffered the embarrassment of its AI image tools making gaffes related to the race of people it generated - such as the black George Washington. Its claims about AI-based search also don't pass the sniff test. If Alphabet's screen summarises a news article for you, you will usually not bother to click through to a website to read it all again (especially through a paywall.) In February, it was revealed that Alphabet had been paying Reddit $US60 million a year to use its content to train its AI models (yes that Reddit, where you never read people spouting complete and utter rubbish.) It has not struck deals with many (if any) of the world's most reputable publishers, so big questions remain about how it is going to keep its AI platforms up to date, without plundering the websites it threatens, without permission.

Google manages to keep the cost of AI search flat

Google has managed to cap the costs it incurs when using AI to generate results. The search giant created a tool called "AI overviews" that sees search results generated by artificial intelligence presented alongside its conventional list of relevant websites. Such tools are felt to be necessary, given the explosion of interest in generative AI - which Microsoft and OpenAI have promoted as a fine way to find info online. Generative AI is therefore a colossal challenger to Alphabet's core search and ads business. That means Google needs to deliver a good AI experience of its own, and keep costs low while doing it - no mean feat, given it has spent decades tuning its compute infrastructure but now must bring dedicated AI-centric hardware into play. Investors could rightly be worried that doing so would dent margins. But on Alphabet's Q2 2024 earnings call on Tuesday, CEO Sundar Pichai reassured them that Google has managed to keep the cost of AI overviews flat. He also mentioned ongoing work to reduce latency so that AI overviews arrive promptly, adding "we are focused on matching the right model size to the complexity of the query in order to minimize impact on cost and latency." Pichai also told investors that users aged 18 to 24 are showing "even higher engagement" with AI overviews - a welcome outcome given Google is considered an old-school outfit by youngsters reared on TikTok. The CEO also opined that AI is just getting started. Asked if training new models is becoming harder due to lack of data, Pichai replied that Alphabet is "driving constant progress in terms of the capabilities of the models" and "more importantly, taking them and translating into real use cases across the consumer and enterprise side. I think on that frontier, I think there is still a lot of progress to be had. And so we are pretty focused on that as well," he explained. While that work continues, AI is already making a contribution to Google Cloud's revenues. "Our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than two million developers," CFO Ruth Porat told investors. Some of that spend showed up in Q2, during which Google Cloud won $10.35 billion of revenue and delivered $1.2 billion in net income. That's a 29 percent year-on-year revenue leap, and vast improvement on Q2 2023's $395 million net income. Overall revenue was $84.7 billion - up 14 percent. Net income jumped over $5 billion to $23.6 billion, as margins widened from 29 to 32 percent. Porat made several mentions of "durably reengineering our cost base" - ongoing efforts to trim Alphabet's workforce, "optimize" its real estate portfolio, and centralize procurement. Keeping the cost of technical infrastructure and ops low also remains on the agenda. So does buying more of it: the CFO revealed Q2 capital expenditure of $13 billion, which she said was "once again driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by datacenters." Porat also revealed that Alphabet intends to invest a further $5 billion in self-driving taxi outfit Waymo, so it can "continue to build the world's leading autonomous driving technology company." Despite Alphabet's earnings exceeding expectations, investors weren't excited - after spending the day at around $184, its share price spiked to $188.65, but then dropped to under $180 in after-hours trading. ®

Google CEO On $41B Cloud Run Rate, 1.5M Gemini AI Developers And Oracle Momentum

'Year-to-date, our AI infrastructure and generative AI solutions for Cloud customers have already generated billions in revenues and are being used by more than 2 million developers,' said Google CEO Sundar Pichai during the company's recent Q2 2024 earnings report. Google CEO Sundar Pichai during the company's second quarter 2024 earnings call spoke bullishly about Google Cloud's record $10.3 billion in quarterly sales, the number of developers using its Gemini AI products as well as its Oracle partnership helping win large AI customer accounts. On the Google Cloud front, total cloud sales were $10.3 billion for Q2 2024, representing an increase of 29 percent year over year. Google Cloud now has an annual run rate of over $41 billion. Additionally, the cloud company generated record operating income of $1.17 billion during the quarter. "Google Cloud reached some major milestones," Pichai said during Google's earnings call on Tuesday. "Quarterly revenues crossed the $10 billion mark for the first time, at the same time pass the $1 billion mark in quarterly operating profit." "Year-to-date, our AI infrastructure and generative AI solutions for Cloud customers have already generated billions in revenues and are being used by more than 2 million developers," Pichai said. "We are uniquely well-positioned for the AI opportunity ahead." [Related: Google Cloud Exec: Microsoft Is 'Paying Off Complainants' After Antitrust Ruling] The Mountain View, Calif.-based tech giant generated a total of $84.7 billion during second quarter 2024, an increase of 14 percent year over year. Google's operating income reached $27.4 billion in Q2 2024. "We are innovating at every layer of the AI stack, from chips to agents and beyond -- a huge strength," he said. "We are committed to this leadership long term." "Gemini now comes in four sizes, with each model designed for its own set of use cases. It's a versatile model family that runs efficiently on everything -- from data centers to devices," he said. "At 2 million tokens, we offer the longest context window of any large-scale foundation model to-date, which powers developer use cases that no other model can handle." He added that "Gemini is making Google's own products better." "All six of our products with more than 2 billion monthly users now use Gemini. This means that Google is the company that's truly bringing AI to everyone," said Pichai. "People are deeply engaging with Gemini models across Vertex and AI studio. We now have over 2 million developers playing around with these things, and you are definitely seeing early use cases." 'Deep' Oracle Partnership Is Helping Google Cloud and Oracle have been tightening their technology and go-to-market partnership in recent years. For example, in June, the two companies announced an expanded partnership that gives customers the choice to combine Oracle Cloud Infrastructure (OCI) and Google Cloud technologies to help accelerate application migrations and monomerization. Pichai said this partnership is helping Google win large enterprise customers such as Hitachi. "In Google Cloud, we continue to see strong customer interest, winning leading brands like Hitachi, Motorola Mobility, and KPMG. Our deep partnership with Oracle significantly expanded our joint offerings to the large customer base," Google's CEO said. "Vertex helps customers such as Deutsche Bank, Kingfisher, and the US Air Force build powerful AI agents," he said. "Uber and WPP are using Gemini Pro 1.5 and Gemini Flash 1.5 in areas like customer experience and marketing. We broaden support for third-party models, including Anthropic's Claude 3.5 Sonnet and open-source models like Gemma 2, Llama and Mistral." He added that Google's AI-powered applications portfolio is "helping us win new customers and drive upsell". Google's conversational AI platform is currently being used by customers like Best Buy and Gordon Food Service. "Our AI-powered agents are also helping customers develop better quality software, find insights from their data, and protect their organization against cybersecurity threats using Gemini," Pichai said. CEO Touts Google's Hardware And TPUs Google has invested billions in 2024 in building new data centers and cloud infrastructure across the globe as well as on AI-specific chips. "Our TPUs are a key bet," said Pichai. "Trillium is the sixth generation of our custom AI accelerator, and it's our best performing and most energy efficient TPU to-date. It achieves a near 5 times increase in peak compute performance per chip and a 67-percent more energy efficient compared to TPU v5e. And the latest Nvidia Blackwell platform, will be coming to Google Cloud in early 2025." Pichai said Google will continue to create capacity by allocating resources towards its highest priorities. "We are relentlessly driving efficiencies in our AI models," he said. "Over the past quarter, we have made quality improvements that include doubling the core model size for AI overviews, while at the same time improving latency and keeping cost per AI overviews served flat."

Google had a massive quarter thanks to Search and AI

Google made nearly $85 million over the past few months as revenue from its Search and cloud computing businesses soared. That's according to the quarter two earnings report released by Google's parent company, Alphabet, on Tuesday, which says Search alone raked in $48.5 million. Meanwhile, Google's cloud division hit $10 million for the first time while also achieving $1 billion in operating profit. During an earnings call on Tuesday, Google CEO Sundar Pichai said the company's generative AI solutions for Cloud customers "already generated billions in revenues and are being used by more than 2 million developers." "We are innovating at every layer of the AI stack," Pichai says in a letter to investors. "Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead." Since becoming a $2 trillion company in April, Alphabet has managed to maintain that position. In May, Google began rolling out AI summaries in Search powered by its large language model (LLM), Gemini. But users quickly found that the tool provided bizarre answers for certain queries, leading Google to manually take them down. This week, Google announced that it's abandoning its long-delayed plans to phase out third-party cookies by default, something Safari and Firefox already do. Google Chrome will instead ask users to "make an informed choice that applies across their web browsing."

Google just beat Wall Street's expectations again

Google on Tuesday reported sales of nearly $85 billion, surpassing Wall Street's expectations by about $500 million. "Our strong performance this quarter highlights ongoing strength in Search and momentum in Cloud," CEO Sundar Pichai said in a statement. "We are innovating at every layer of the AI stack. Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead." Wedbush, J.P.Morgan, and Bank of America analysts had forecast that AI would boost Google's performance in the second quarter. Google's solid performance in the three months ended June 31 follows its sunny first quarter earnings report in April, when the company reported a surge in profits of 60%, partly thanks to AI. The company's stock price that followed pushed its market capitalization past the $2 trillion mark to join Apple, Microsoft, and Nvidia. Google has aggressively worked to dominate the emerging industry for generative artificial intelligence. In 2024, it announced a range of new and updated AI products -- its latest is a Gemini AI chatbot that Google claims is 20% faster than the newest ChatGPT. Google also previewed a universal AI assistant of the future at its developer conference, Google I/O, that would be able to see and talk through a user's smart glasses. Prior to Google's second quarter earnings report, the company got a bit of bad news when its largest-ever acquisition fell through. Google's $23 billion bid to purchase the Israeli cybersecurity firm Wiz was rejected.