Google's second-quarter earnings exceeded expectations, with strong performance in search advertising and cloud computing, although YouTube ad revenue fell short. The company reported earnings of $1.89 per share, a 31% increase from the previous year, and a 14% rise in gross revenue to $84.74 billion. Both figures surpassed analysts' expectations, which were earnings of $1.84 per share on revenue of $84.22 billion. Despite these positive results, Google stock fell over 5% due to concerns over rising expenses and potential impacts on margins in the upcoming quarter.
Analysts had mixed reactions to the earnings report. Mark Mahaney, an analyst at Evercore ISI, praised the strong growth in search and cloud but noted the YouTube ad revenue miss, attributing it largely to tough year-over-year comparisons. On the other hand, there are rising concerns about the impact of increased AI spending on margins in the coming quarters.
Reinhardt Krause, Investors Business Daily author, wrote, “Shares reversed down during the earnings call with Wall Street analysts. Management signaled higher expenses in the September quarter, possibly curtailing margin growth. ‘Operating margins in the third quarter will reflect both the impact of the increase of depreciation expenses (tied to the higher level of capital investment) and the increase in cost of revenues due to the pull-forward of certain hardware launches into the quarter,’ said William Blair analyst Ralph Schackart, in a report.”
Additionally, RBC Capital analyst, Brad Erickson, said, “The after-hours reversal seemed largely attributable to management's Q3 margin commentary calling out expected impact from (AI-related) higher depreciation and the hardware launch pull-forward. Margin expansion is expected to continue, but with the buy-side looking for 2025 EPS above $9, this will likely temper that expectation slightly.” These margin concerns played a significant role in the stock decline despite the earnings and revenue beat.
Further, Google announced increased capital spending, including a significant $5 billion multi-year investment in its self-driving unit, Waymo. Ruth Porat, transitioning to a new role as president and chief investment officer, will oversee these investments along with Alphabet's other ventures. Google's new CFO, Anat Ashkenazi, will assume her role starting July 31, as the company continues to navigate its expansive growth and investment strategies. This earnings report, along with Tesla’s subpar report, served as a catalyst, sending the market downward during trading on Tuesday. The S&P 500 fell over 2% during intraday trading, demonstrating the significant impact mega-cap tech stocks can have on the market.
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