TMTPost --  Google recorded stellar-than-anticipated double-digit growth in the third quarter, highlighting its hefty investment in artificial intelligence (AI) is paying off.

Credit：Google Cloud

Google parent Alphabet Inc. said its revenue for the quarter ended September 30 gained 15.% year-over-over (YoY) to $88.3 billion, beating the Wall Street projection of $86.54 billion. Diluted earnings per share (EPS) surged 36.8% YoY to $2.12, compared with analysts’ estimates of $1.84. Operating income $28.52 billion with a  33.6% YoY increase, whereas analysts expected $26.67 billion. The operating margin climbed 4 percentage points YoY to 32%, topping expectation of 31.4%.

Alphabet revenue for the September quarter beat across the board, and the cloud business, which is deemed as the future growth engine , delivered the most stellar increase in sales that quarter. Revenue from Google Cloud jumped 35% YoY to a record of $11.35 billion, better than analysts estimated $10.79 billion. Operating income of the business soared 632% to another quarterly record of $1.95 billion, beating estimate $1.11 billion.

Alphabet’s core segment Google advertising generated $65.85 billion with a 10.4% YoY rise, compared with analysts’ forecast of $65.5 billion. In  the segment, both Google Search and YouTube ad recorded a second straight quarter slowdown in revenue, reflecting difficulties the company is facing, but the revenues all grew stronger than expected. Revenue from Google Search and other rose 12.1% YoY to $49.39 billion following a 13.8% YoY increase for the previous quarter, beating analysts projected $49.08 billion. Reversing a miss from April to June, YouTube ad notched a YoY increase of 12.2% in revenue of $8.92 billion, versus expectation of $8.89 billion.

Cloud is the business of tech giants that is currently most evidently benefiting from generative AI applications as their investments in developing AI helped drive demand for cloud services. Alphabet and Google CEO Sundar Pichai attributed the robust growth to AI tech deployment. 

“The momentum across the company is extraordinary. Our commitment to innovation, as well as our long-term focus and investment in AI, are paying off with consumers and partners benefiting from our AI tools,” Pichai said. ”In Search, our new AI features are expanding what people can search for and how they search for it. In Cloud, our AI solutions are helping drive deeper product adoption with existing customers, attract new customers and win larger deals.”

YouTube’s total ads and subscription revenues surpassed $50 billion over the past four quarters for the first time, Pichai added.

Analysts are bullish on Alphabet after the strong quarterly earnings. Alphabet's latest earnings demonstrated "the company’s continued leadership in the AI era, helping to address one key element of the bear case around the company’s 'terminal' value," according to Evercore ISI analyst Mark Mahaney.  Jefferies analyst Brent Thill wrote that AI "feels increasingly like a well-managed tailwind" for the Google parent company.

JPMorgan analysts raised the price target for Alphabet to $212 from $208 and reiterated an overweight rating. The increased price target resulted from  "Google's increased confidence" in the rollout of its AI search business; its strong cloud business  with 35% YoY revenue growth and upside for operating profits given the company's plans to "re-engineer the cost structure", according to the analysts. Citigroup analysts stuck with their buy rating and $212 price target for Alphabet. The broker, like JPMorgan, noted Google Cloud's "accelerating growth from greater GenAI demand,"