Alphabet disappoints with lower-than-expected search, while cloud accelerates and shifts company's center of gravity

Alphabet shares suffered a negative reaction after the quarterly earnings, which showed revenue and profit below estimates and weakness concentrated in the search business. According to Scott Devitt, managing director and senior analyst at Rosenblatt Securities, in an interview with Bloomberg Television, the result is "a difficult quarter for Alphabet's narrative."

Search revenue increased 12%, compared to market expectations of 15%, which represents a deviation of around 300 basis points, according to the analyst. Margins in this segment were also below expectations. Devitt noted that the company does not offer an explicit projection for this number and that it faced a demanding basis of comparison, as the previous year saw accelerated growth.

The cloud compensates for some of the wear and tear

The counterpoint came from Google Cloud. According to the analyst, the division's revenue rose 103%, well above expectations, and margins also exceeded projections. He described a business that is still growing at 25%, with a margin of around 30% and that, added to other operations, trades below 20 times profits.

Devitt also drew attention to a fact from the conference call: the president of the cloud division participated in the earnings call for the first time. For the analyst, the signal is clear: the company's center of gravity is gradually moving towards the cloud, while search, which was the most dominant business model in the world until the arrival of artificial intelligence, loses relative protagonism.

The ghost of AI over search

For those who see a long-term threat from AI, the result feeds the pessimistic thesis, said Devitt, and that is what weighs on the shares. According to him, Alphabet already incorporates features such as AI summaries, and Gemini has had good model updates recently. The challenge is that the company is no longer the only option for searching for information and has become one of a few, a standardization that, in his analysis, can compress the company's multiple.

The comparison with competitors was evident. Meta grew 26% in advertising in the quarter, more than double the pace of Alphabet's search, and the analyst predicted that Amazon's advertising growth, to be released the following day, will also be much higher. Devitt attributed this to directing queries to other distribution channels, including the AI ​​model companies themselves.

A structural issue?

Devitt doesn't see the problem as structural. In his assessment, growth should stabilize at these levels, as the comparison basis normalizes. He recalled that the company itself reported that the volume of consultations had the fastest growth in the last five years in the quarter, and said he expected the company to explain the difference between this increase and that of revenue.

Regarding possible action in commerce based on AI agents, the analyst said he sees the strategy more as replacing traditional blue links with a more interactive Gemini interface than leadership in this segment. For him, the size of the query volume makes Alphabet a "very satisfactory" participant, although not the best, which would support the long-term thesis.

Automatically translated from Portuguese.