Google might be the largest company in the world whose fate seems completely out of its hands these days, but the $2 trillion internet giant still has a few cards it can play.
Some of them were on display in the third-quarter report from Alphabet, the parent company, late Tuesday. Revenue and operating income beat Wall Street’s estimates thanks to strength in the company’s core search business and its cloud-computing operation. Google Cloud’s revenue jumped 35% year over year, up 6 percentage points from the growth rate shown in the last quarter and the best for the unit in two years. The unit produced operating income of $1.9 billion, which was 77% ahead of analysts’ consensus targets, according to FactSet.
Meanwhile, Google’s services segment, comprising search, YouTube ads, subscriptions and devices, generated operating income of nearly $30.9 billion, which was 9% ahead of expectations. It produced an operating margin of 40.3%—the highest since Alphabet began reporting profitability data for its core business going back to late 2019.
Alphabet’s share price jumped nearly 6% in after-hours trading Tuesday. The stock was well primed for some good news, having lost almost 7% of its value since the company’s last earnings report because of growing worry about blowout spending on artificial intelligence capabilities. While that is a concern hanging over Google’s mega-cap tech peers, Google is also contending with several antitrust cases brought by the federal government. The Justice Department is expected to file papers by Nov. 20 that could seek a breakup of the company that powers over 90% of the world’s internet searches.
Questions about Google’s destiny have weighed on the shares of its parent. Alphabet’s stock trades at 20 times projected earnings for the next four quarters—the cheapest among mega-cap techs including Apple, Amazon.com, Microsoft, Nvidia and Meta Platforms. Alphabet is the only one of those trading at a discount to the S&P 500 index. The company has vowed to fight the government’s breakup efforts, which likely extend uncertainty well into next year at the very least.
What Google can do in the meantime is deliver a robust bottom line in an age when tech giants are pouring billions into AI investments looking to power growth. Tuesday’s report gave some clues as to how. Alphabet added nearly 1,700 workers to its rolls during the quarter after two consecutive periods of declines. But the recent hires were still well below the company’s norm for the third quarter, when it has historically onboarded loads of top university graduates. It averaged more than 7,000 new hires in the third quarter between 2018 and 2022.
Anat Ashkenazi, Google’s new chief financial officer, who started in July, signaled Tuesday that costs will remain a major focus. Capital spending is on track to surpass $51 billion this year—up 59% from last year. But Ashkenazi said on Tuesday’s call that next year’s spending is unlikely to grow at the same pace. She added, “We will be looking for efficiencies so that we can fund innovation in priority areas.”
A more frugal Google is a better look these days.
Write to Dan Gallagher at dan.gallagher@wsj.com