AI fears are tempered by Alphabet's first-quarter results.

• Alphabet's impressive first-quarter results demonstrated the company's ability to increase ad sales and control costs simultaneously in the AI sector.
• The cloud business's profit more than quadrupled, and revenue climbed 15%, the fastest rate since early 2022.
• The after-market stock rally lifted Alphabet's market cap past $2 trillion.

On Thursday, Google released its earnings report, which raised concerns about the growth of its core Google ads business and the company's ability to generate profits from its significant investments in artificial intelligence.

Wall Street's fears were temporarily assuaged by the company.

Analysts' estimates were topped by the alphabet, which reported a 15% revenue growth rate for the quarter, the fastest since early 2022. Additionally, YouTube's ad sales jumped 20%, surpassing expectations.

There are concerns about the future of Google's online ads due to the growing popularity of new generative AI services like OpenAI's ChatGPT, which are providing consumers with alternative ways to access information.

"Alphabet CFO Ruth Porat expressed satisfaction with the growth of their ads businesses during the earnings call on Thursday, stating that search had broad-based growth."

The market cap of Alphabet surpassed $2 trillion after the company's shares rocketed 12% in extended trading, outpacing the Nasdaq Composite but lagging behind some mega-cap peers such as Microsoft, Amazon, and Apple. Prior to the report, Alphabet's stock had risen 12% year-to-date, outperforming the Nasdaq Composite but underperforming some of its peers.

The core advertising business is experiencing a reacceleration in the first quarter of 2023, after a challenging 2022 and 2023 due to rising interest rates and inflationary concerns. Digital ad growth is widespread, with Meta reporting a 27% increase in the first quarter, the fastest since 2021, and a 21% growth rate, which matches the level seen in early 2022.

Since last year, Alphabet has been cutting costs in preparation for slower ad growth and increased spending on AI, where competition has intensified rapidly in the past year. Additionally, the company has faced a series of apparent missteps due to the hasty release of various AI products.

There were other reasons for skepticism ahead of Alphabet's earnings report.

On Wednesday, Meta's first-quarter report caused investors to sell off the stock, dropping it by as much as 19% in extended trading. During the investor call, CEO Mark Zuckerberg announced plans to invest billions of dollars in areas like artificial intelligence and the metaverse, despite the fact that Meta generates 98% of its revenue from advertising.

Alphabet is investing heavily in AI, and its efforts are starting to pay off with increased sales.

Google Cloud's revenue increased by 28% to $9.57 billion, surpassing expectations, while its operating income quadrupled to $900 million, indicating that the company is now generating significant profits after investing heavily in the business to compete with Amazon Web Services and Azure.

Alphabet unveiled a range of products last month, including Vertex AI, a user-friendly platform for enterprise companies to develop their own AI models.

During the earnings call on Thursday, CEO Sundar Pichai stated that there were numerous questions last year, but we always felt confident and comfortable that we would enhance the user experience.

Pichai stated that he has obtained "early confirmation" that the company can utilize AI to enhance search capabilities, citing rollouts in the U.S. and U.K. He added that the company can effectively manage expenses and monetize AI tools simultaneously in the upcoming quarters.

Alphabet announced a quarterly dividend of 20 cents per share and a plan to repurchase $70 billion in stock to demonstrate its financial stability.

Alphabet must now meet heightened expectations as competitors release more generative AI products, with only a few more quarters left before growth is comparable to some of its weakest results on record.

At a recent all-hands meeting, Prabhakar Raghavan, a senior vice president in charge of search, emphasized the need for employees to work faster due to the new cost reality.

Raghavan stated that with the use of generative AI, the company is significantly increasing its spending on machines. However, he noted that the rate of organic growth is slowing down and the number of new devices entering the market has decreased.

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