AI Overview damages Google ad revenue, stock crashes 12%
The third quarter earnings reports are coming in! And Google’s was so good it knocked 12% off the stock price. Google Class A shares closed on Wednesday at $324.89. Today they closed at $283.82 — 12% down. Class C shares did much the same. The culprit was AI — how much Google is spending and how…
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Annons
The third quarter earnings reports are coming in! And Google’s was so good it knocked 12% off the stock price. Google Class A shares closed on Wednesday at $324.89. Today they closed at $283.82 — 12% down. Class C shares did much the same. The culprit was AI — how much Google is spending and how much money they’re not getting back from it. Revenue is way up! But net income is down a bit. AI search is worse, but it also makes less ad money. And cash flow is negative, from AI spending. Google is blowing a ton of money on AI buildout, and neglecting that they are, in fact, an ad agency. AI Mode and AI Overviews are getting used in more searches, and they’re also up in the time they take — but they’re generating less ad revenue. Philipp Schindler from Google waffled a bit on the earnings call, but he eventually admitted: [Alphabet] the strong growth in AI Mode queries had an impact because of the lower monetization we were seeing in AI Mode. To be clear, we feel very good about our trajectory here. Well, that’s all right then! This is after a lot of talk on the call about people spending much longer talking to AI Mode when they’re searching something. That is, Google is failing to give good search results quickly. Google is sure that wasting people’s time is good — even if it’s costing them directly. Because it’s AI! Google told us in May — all AI Mode is the future of search! What a great idea. We usually say to ignore non-standard numbers in company accounts. But there’s one non-standard number that Google put in to the earnings report even though it looks terrible — the free cash flow calculation. That’s net cash coming in, minus “purchases of property and equipment.” [Alphabet, PDF] Over the past four quarters, free cash flow has gone steadily down. It went negative, a loss of $5.8 billion, in second quarter — for the first time since 2004 — and down even further in third quarter, to a loss of $9 billion. Google is, of course, blowing this money on AI. In fact, they’re committed to over a trillion dollars in infrastructure spending over the next few years. Here’s CFO Anat Ashkenazi on the earnings call: We have also entered into multiyear agreements to secure capacity for technical infrastructure and inventory, as well as leases and energy. At the end of the third quarter, we had future purchase commitments of $924 billion and pre-commencement leases and other obligations of $152 billion. Though they could get out of some of those commitments. So that’s nice. How is Google going to pay for all of this? In July, Google issued another $85 billion in stock specifically to fund its AI ambitions. [FT, archive] Google ads are doing great! Google Cloud is doing great! But the AI is a money pit and it’s dragging everything else down. But Google CEO Sundar Pichai loves the chatbot. And he can afford to keep throwing money at it. I wonder if, when the crash comes, Pichai is the last man standing and still burning money on this thing. Video — Podcast It’s pledge week at Pivot to AI! Please put in your $5 to keep us going! It really helps!