Yesterday, Google (GOOG) (GOOGL) parent Alphabet released its third-quarter earnings results. Its operating expenses reached an all-time high, disappointing some shareholders but impressing semiconductor investors. Google is spending on the cloud, AI, and consumer hardware, where it sees growth opportunities. By investing in these businesses, it can diversify its revenue beyond advertising, which accounts for over 85% of its revenue.
Google eyes cloud and consumer hardware for non-advertising revenue
Google earns revenue through the sale of subscriptions and hardware devices and for licensing technology such as its Android operating system. It reports this revenue under its Other segment.
In the third quarter, Google’s Other revenue rose 39% YoY (year-over-year) to $6.4 billion, driven by cloud revenue. The Other segment accounted for 19% of Google’s overall revenue, which rose 20% YoY. In the third quarter, cloud rivals Microsoft Azure and AWS (Amazon Web Services) saw their revenue rise 59% and 35% YoY, respectively. According to Canalys, Google Cloud stood third in the cloud infrastructure service market with a 9.5% share in the second quarter. AWS and Azure led the market with 31.5% and 18.1% shares.
Google’s cloud and consumer hardware offerings
Google doesn’t provide a breakdown of its consumer hardware or cloud revenue. However, during Google’s third-quarter earnings call, CEO Sundar Pichai reported that Google Cloud is being adopted by leaders in different sectors, from the Mayo Clinic to National Australia Bank to Macy’s. In consumer hardware, Google debuted its mid-tier Pixel 3a smartphone in May and its Pixel 4 and Pixel 4 XL smartphones in October. It also offers the Pixelbook Go, Nest Mini speaker, and Nest Wifi. This quarter, it’s set to launch its Pixel Buds wireless headphones and Stadia streaming gaming platform.
Google and Amazon direct operating expenses toward cloud
Consumers and enterprises can rent computing power and software services on the Internet with Google Cloud. The Internet search giant is investing in building data centers, buying equipment, and hiring technical and sales teams to support its cloud business. In the third quarter, Google increased its operating expenses by 23% YoY to $13.8 billion. It hired 6,450 employees in the third quarter alone, mostly in technical and sales roles for its cloud business. It plans to hire more than 20,000 people this year.
Amazon (AMZN) is also hiring technical and sales employees to support its cloud computing business. These hires increased its operating expenses by 26.4% YoY in the third quarter.
The two tech giants’ rising operating expenses are hurting their EPS. In the third quarter, Google’s EPS fell 22% YoY to $10.12, missing analysts’ estimate of $12.42. And Amazon’s EPS fell 26.4% YoY to $4.23, missing analysts’ estimate of $4.59. Investors may not be happy about the lower EPS. However, they may accept the companies’ higher spending if their revenue growth stays strong, especially from the cloud business. Amazon stock survived the EPS miss, and Google stock could, too.
Semiconductor companies benefit from increasing cloud spending
In the third quarter, Google increased its capital expenditure by 28% YoY to $7.2 billion, of which it spent 60% on technical infrastructure. Google CFO Ruth Porat explained the company’s technical infrastructure spending is heavily skewed toward data centers and servers. Amazon is also spending on its cloud business. In the third quarter, it spent $4.7 billion on data centers and warehouses.
Intel (INTC), Advanced Micro Devices (AMD), and Nvidia (NVDA) could benefit from the higher cloud infrastructure spending. They supply processors and graphics cards for cloud data centers. AMD is powering Google’s upcoming Stadia gaming platform.
In the third quarter, Intel’s data center revenue rose 4.2% YoY, and its cloud revenue rose 3% YoY. During Intel’s third-quarter earnings call, CFO George Davis said, “Returning to growth after a historic 2018 platform refresh as cloud service providers exited a three quarter passivity absorption cycle.” AMD, set to release its third-quarter earnings results today, is expected to report strong data center revenue growth. Nvidia’s data center revenue could also rise as cloud giants invest in infrastructure and AI.