Cloud Business Concerns Impact Alphabet Shares Despite Strong Overall Performance

Revenue Growth Amid Ad Rebound

Alphabet has disclosed an 11% surge in its third-quarter revenue, signifying the company’s leap into double-digit expansion after over a year, thanks to the bounce back in advertising. Despite the impressive numbers, the shares faced a nearly 7% downfall in extended trading, largely due to the disappointing performance of its cloud business, which failed to meet analysts’ projections.

Key Results Unveiled

  • Earnings Overview: Alphabet posted earnings of $1.55 per share, which surpasses the anticipated $1.45 per share as forecasted by LSEG, the organization previously recognized as Refinitiv.
  • Revenue Figures: The tech giant’s revenue for the quarter was $76.69 billion, slightly above the LSEG’s expectation of $75.97 billion.

Performance Breakdown

  • YouTube Ad Revenue: YouTube’s advertising revenue for the quarter exceeded expectations at $7.95 billion, outdoing the predicted $7.81 billion as stated by StreetAccount.
  • Google Cloud: The cloud segment of the company fell short of the expected figures, generating revenue of $8.41 billion against the $8.64 billion projected by StreetAccount.
  • Traffic Acquisition Costs: Costs associated with traffic acquisition reached $12.64 billion, closely matching the StreetAccount’s anticipation of $12.63 billion.

This impressive double-digit boost in revenue comes on the heels of four consecutive quarters where the growth remained confined to a single digit. The core advertising sector of Google had previously suffered due to the economic slowdown last year, coupled with burgeoning competition from platforms like TikTok.

For this quarter, Alphabet reported ad revenue of $59.65 billion, marking an increase from $54.48 billion recorded in the previous year. Interestingly, YouTube’s advertising revenue exceeded analyst expectations, landing at $7.95 billion. In a subsequent call with investors, Alphabet’s CEO Sundar Pichai announced that Shorts, YouTube’s answer to TikTok, witnessed a substantial jump to 70 billion daily views, a notable climb from just over 50 billion at the start of the year.

Cloud’s Underperformance

Though Google Cloud’s revenue failed to meet expectations, coming in at $8.41 billion and missing the target by a tad over $20 million, it remains a focal point of investment for Alphabet. This emphasis comes as the tech behemoth seeks to rival industry leaders like Amazon Web Services and Microsoft Azure. The significance of the cloud business is accentuated by the rising wave of generative artificial intelligence, prompting numerous companies to pivot towards the public cloud to manage their intensive workloads.

Remarkably, in spite of the setback, the cloud segment witnessed a 22% growth year-on-year, which is twice the overall growth rate of the company. Further sweetening the pot, the cloud business transitioned to an operating profit of $266 million, a turnaround from the loss of $440 million it endured during the same period last year.

Analysts and Executives Weigh In On Alphabet’s Performance

“If you want this stock to keep going higher, you’ve got to have cloud become more profitable,” remarked Lee Munson, Chief Investment Officer of Portfolio Wealth Advisors, during an interview with CNBC’s Kelly Evans on Tuesday. He further critiqued, “It’s a third-rate cloud platform. We need to see it make money.”

Finance Chief Ruth Porat, during the investor call, shared that cloud growth was consistent across various sectors, geographies, and products. However, she acknowledged that the current expansion rate “reflects the impact of customer optimization efforts.” This statement generally alludes to clients becoming more conservative in their expenditures. Additionally, Porat made a significant announcement: after serving as CFO for eight years, she will transition into the role of Chief Investment Officer, having revealed her decision to step down earlier in July.

CEO Sundar Pichai, addressing concerns about diminished cloud spending, mentioned in the call that Google has actively “leaned into it to help customers given some other challenges they were facing.”

Google’s Foray into Generative AI

Post the launch of OpenAI’s ChatGPT chatbot in the latter part of the previous year, Google has accelerated its efforts to integrate generative AI technology into a broader range of products. Presently, it’s undergoing tests within its core search functionality. The generative AI, which is known for offering more comprehensive and creative responses to basic text queries, might profoundly influence Google’s search and advertising sectors, especially if user behaviors regarding online information search undergo a transformation.

Cost-Cutting Measures and Workforce Impacts

Google’s trajectory this year prominently features cost-reduction measures, contrasting its previous years of unrestrained growth. In a significant move in January, the tech behemoth declared the elimination of 12,000 jobs, which amounts to approximately 6% of its total full-time workforce. Moreover, last month witnessed the company cutting hundreds of positions within its recruitment department.

Further consolidating its cost-cutting approach, Google initiated focused layoffs during the third quarter across different business units. Estimates suggest that around 40 to 45 employees from the news division were relieved from their duties. Furthermore, the self-driving car venture, Waymo, also experienced a round of layoffs, even though it recently announced plans to expand its autonomous ride-sharing service.

Stock Performance

Before the unsettling drop in after-market trading, Alphabet’s shares had witnessed a commendable growth of 47% this year, outperforming the S&P 500, which experienced an approximately 11% rise over the same duration.

Is Alphabet Stock Halal?

The concept of Shariah compliance in the stock market revolves around ensuring that investments adhere to Islamic principles. For a stock to be deemed Shariah-compliant, it needs to meet specific criteria rooted in Islamic finance. These benchmarks relate to a company’s core business activities, the nature of its debt, and the kind of securities it holds.

Three Main Criteria for Shariah Compliance According to AAOIFI:

  1. Business Activity: The sum of revenues generated from non-halal and doubtful sources should not surpass 5% of the company’s total revenue (comprising Gross Sales + Other Income).
  2. Interest-bearing Debt: The interest-bearing debt, whether short-term or long-term, should remain under 30% of the company’s market capitalization.
  3. Interest-bearing Securities: The combined value of short-term and long-term interest-bearing securities and assets must not exceed 30% of the company’s market capitalization for it to be considered Shariah compliant.

Assessment of Alphabet’s Shariah Compliance:

  1. Business Activity:
    • Doubtful Revenue: 30.70%
    • Non-Halal Revenue: 1.58%

Given the combined total of 32.28% (Doubtful + Non-Halal) exceeds the 5% threshold, Alphabet does not meet the business activity criterion for Shariah compliance.

  1. Interest-bearing Debt:
    • Interest-bearing Debt Percentage: 0.94%

Alphabet complies with this criterion since its interest-bearing debt is well below the 30% cap.

  1. Interest-bearing Securities and Assets:
    • Interest-bearing Securities and Assets Percentage: 7.83%

Again, Alphabet complies with this threshold as its interest-bearing securities and assets remain below the 30% mark.

Final Verdict

While Alphabet adheres to two of the three primary criteria for Shariah compliance concerning interest-bearing debt and securities, its business activity component, particularly the revenue from doubtful sources, exceeds the permissible limit.

Consequently, Alphabet’s stock is classified as DOUBTFUL from a Shariah compliance perspective at Musaffa.

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