Key Points
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Alphabet’s Google Cloud is now adding more revenue each quarter than Search, but Search is still growing.
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Investors are fearful that AI will hurt Google Search’s financial performance in the coming years.
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Google Cloud can make up for any lost revenue from Google Search.
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When it comes to artificial intelligence (AI), no company has a greater opportunity or threat from the novel technology than Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). The parent company of Google, Android, YouTube, and other platforms is trying to steer its ship toward the AI opportunity head-on, with ChatGPT, Claude, and other chatbots potentially threatening Google Search’s monopoly.
So far, this effort has not shown up in the financials, even as Google Search reached an all-time high in revenue last quarter. However, so did Google Cloud, with revenue growing 82% year over year, much faster than any other part of Alphabet’s business.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
Is Google Cloud now a bigger growth driver than Search?
Rapid cloud growth in the age of AI
Due to the AI infrastructure build-out, Alphabet’s Google Cloud business is booming. As mentioned, revenue grew 82% year over year last quarter, reaching $24.8 billion. That is up from $13.6 billion in the same quarter a year ago, representing highly impressive growth for a business of this size, adding $11.2 billion in new quarterly cloud revenue compared with the previous year.
Google Search is not growing nearly as quickly on a percentage basis, as Q2 revenue rose 17% year over year. However, it is much larger than Google Cloud today, generating $63.3 billion in revenue last quarter and $54.2 billion in the same quarter a year ago.
Still, it was a lower nominal revenue increase than at Google Cloud, with $9.1 billion in revenue growth from a year prior, meaning that Google Cloud is now officially more important to Alphabet’s revenue growth story than Google Search.
Can Cloud replace Google Search?
The fear with Alphabet’s business is that ChatGPT, Claude, and even Alphabet’s homegrown chatbot, Gemini — which just reached 950 million monthly active users — will replace Google Search volumes and, therefore, lead to a decline in advertising revenue. This is a real risk to the business given the rise in chatbot usage, and I think Google Search revenue could eventually hit a wall. However, it is not an apples-to-apples comparison, because the Gemini AI infrastructure now underlies all of Alphabet’s services, including Google Search AI summaries.
Google Cloud has ample growth potential to mitigate any AI-related declines affecting Google Search. If the AI boom continues and Google Search is hurt, Alphabet may face a revenue headwind, but that will only mean more demand for Google Cloud’s data center services.
Even so, Google Search revenue shows no signs of slowing, meaning the business is benefiting from Google Cloud growth alongside Google Search, which is why overall revenue grew 23% year over year last quarter.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
