Can the huge sums companies invest in generative AI produce a return on investment?
The answer depends on how you define return. For publicly-traded companies, the return comes from faster-than-expected growth. The reason that matters is investors reward such growth with a boost in stock price, as I noted in my book, Brain Rush.
By that metric, Alphabet, Google’s parent company, is earning a return on its investment in generative AI. The proof is in the company’s faster than expected third quarter growth in cloud services and higher than expected profits.
Here are three reasons, Alphabet stock is likely to continue to keep rising:
- Increased demand for Google Cloud services;
- Rising advertising revenue; and
- Higher margins resulting from the company’s AI investment.
To be sure, antitrust lawsuits against the company loom over Alphabet’s future, noted the New York Times. However, if the company can invest more in AI and get faster growth and higher margins in return, investors will bid up Alphabet stock.
Alphabet’s Third Quarter Performance
Alphabet reported stronger-than-expected third quarter earnings results, according to CNBC. Boosted by cloud revenue, Alphabet shares rose 5% on October 30.
Here are the key numbers:
- Q3 2024 revenue: $88.27 billion — up 15% compared to the year before and nearly $2 billion more than the London Stock Exchange Group consensus.
- Q3 2024 earnings per share: $2.12 — up 36.8% from the previous year and 27 cents above LSEG expectations.
- Q3 2024 net income: $26.3 billion — up 34% and $3.4 billion above analysts’ estimates, according to the Times.
Google is benefiting from its investment in artificial intelligence. AI is “paying off and driving success for the company,” Sundar Pichai, Google CEO, told financial analysts in an October 29 earnings call featured by the Times.
Increased Demand For Google Cloud
AI helped Google achieve faster-than-expected growth in cloud revenue — which rose 35% to $11.35 billion, CNBC reported.
Behind that growth in demand was a rise in subscriptions for enterprise customers. Google has attracted billions of users of its “full stack” of AI products, Pichai told investors, thereby “creating a virtuous cycle.”
“This business has real momentum, and the overall opportunity is increasing as customers embrace gen. AI,” he added.
Google’s Rising Advertising Revenue
Although Google’s share of the search engine market is declining, the company enjoyed advertising growth from several industries. In addition, AI Overviews — which deliver “conversational summaries topping links for many search queries,” noted Investor’s Business Daily — helped accelerate revenue growth.
Nevertheless, in 2025, Google’s search advertising market share is expected to drop below 50%, according to eMarketer, as Amazon and TikTok win a larger share of the market.
Despite that loss of market share, Google’s search engine advertising revenue rose 12% to $49.4 billion in the third quarter — topping analysts’ estimates by $400 million, noted the Times.
Insurance and retail ads drove this growth, Philipp Schindler, Google’s chief business officer, said during the call. Meanwhile, YouTube advertising revenue increased 12% to $8.9 billion from election-related ads, Schindler told investors.
In May, Google began rolling out AI Overviews which are driving up advertising revenue. “People are asking longer and more complex questions and exploring a wider range of websites,” Pichai told investors in reference to AI Overviews — which reported a billion users, according to Yahoo! Finance.
“What’s particularly exciting is that this growth actually increases over time as people learn that Google can answer more of their questions,” he added.
One analyst shares Pichai’s enthusiasm. “AI Overviews are driving increased engagement and user satisfaction, partly through longer and more complex queries,” wrote JPMorgan, analyst Doug Anmuth, in a report featured by IBD.
“AI Overviews are monetizing at roughly the same rate as non-AI searches. In addition to running ads above and below AI Overviews, Google is now showing search and shopping ads in AI Overviews for mobile users in the U.S.,” added Anmuth.
How AI Investment Helps Boost Alphabet’s Profits
Large technology companies are continuing to boost their AI capital expenditures. The combined capital expenditure of the largest U.S. tech companies is forecast to rise 16.5% from $218 billion in 2024 to $254 billion in 2025, according to Barron’s.
Companies’ ability to earn a return on that investment depends on how much AI adds to their revenue growth and profitability. AI is helping Google to grow more profitably.
Google told investors AI has helped the company reduce the cost of Generative AI queries 90% while doubling the size of its Gemini model over the last 18 months, noted IBD.
Indeed, Alphabet — which in Q3 2024 spent $13 billion on capital expenditures, noted the Times — plans to continue using AI to cut costs by streamlining workflow and managing headcount, Alphabet CFO, Anat Ashkenazi, told investors, according to CNBC.
While Google’s third quarter capital expenditures rose 62% and exceeded the consensus estimate by about $400 million, Ashkenazi signaled the company’s capital spending could moderate in 2025, noted IBD.
With the help of the company’s generative AI investment, Google’s focus on profitable growth could send the company’s stock to new record highs.
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