Google has successfully limited the costs associated with using AI to generate search results. They developed a tool called “AI overviews,” which displays AI-generated search results alongside the traditional list of relevant websites. This tool has become essential due to the growing interest in generative AI, a trend heavily promoted by Microsoft and OpenAI as an efficient way to find information online.

Generative AI poses a significant challenge to Alphabet’s core search and advertising business. Therefore, Google must provide an excellent AI experience while managing costs. This is particularly challenging because, despite spending decades optimizing its computing infrastructure, Google now needs to incorporate specialized AI-centric hardware.

Investors might be concerned that implementing AI overviews could reduce margins. However, during Alphabet’s Q2 2024 earnings call, CEO Sundar Pichai reassured them that the cost of AI overviews has remained stable. He also mentioned efforts to reduce latency, ensuring prompt delivery of AI overviews, and emphasized their focus on matching the appropriate model size to query complexity to minimize costs and latency.

Pichai highlighted that users aged 18 to 24 are showing increased engagement with AI overviews, a positive development considering Google is often viewed as traditional by younger audiences accustomed to platforms like TikTok.

He also noted that AI is in its early stages. When asked about the challenges of training new models due to limited data, Pichai stated that Alphabet is making continuous progress in enhancing model capabilities and applying them to practical consumer and enterprise uses. He expressed confidence in ongoing advancements in this area.

AI is already contributing to Google Cloud’s revenue, with CFO Ruth Porat reporting that their AI infrastructure and generative AI solutions have generated billions in revenue and are utilized by over two million developers.

In Q2, Google Cloud generated $10.35 billion in revenue and achieved $1.2 billion in net income, marking a 29% increase in revenue from the previous year and a significant improvement from Q2 2023’s $395 million in net income. Overall revenue for the company reached $84.7 billion, up 14%, with net income rising by over $5 billion to $23.6 billion and margins expanding from 29% to 32%.

Porat highlighted ongoing efforts to “durably reengineer our cost base,” which include workforce reductions, optimizing the real estate portfolio, and centralizing procurement. Maintaining low costs for technical infrastructure and operations remains a priority.

The CFO disclosed that Q2 capital expenditures totaled $13 billion, primarily directed toward technical infrastructure, with the largest portion allocated to servers and data centers.

Additionally, Alphabet plans to invest another $5 billion in its self-driving taxi company, Waymo, to advance its position as a leading autonomous driving technology provider.

Despite Alphabet’s earnings surpassing expectations, investor enthusiasm was muted. After reaching approximately $184 during the day, the share price briefly spiked to $188.65 but then fell below $180 in after-hours trading.

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