Even while sales at competitor Microsoft’s (MSFT.O) cloud segment surged, Alphabet, the parent company of Google, saw its cloud business slow down to its lowest point in at least 11 quarters, which sent the stock down 5.7% after hours.

The decline in Google’s stock price, even though the firm exceeded Wall Street forecasts for earnings and revenue, demonstrates the extent to which investors expect the company to progress in artificial intelligence and the resilience of the cloud computing industry versus Microsoft’s Azure and Amazon.com’s AWS.

Companies have reduced spending on cloud-related services, notably costly AI tools, due to fears of a deteriorating global economy. As a result, revenue growth in Google’s cloud segment dropped to 22.5% in the third quarter from 28% in the previous three months.

The third quarter of 2021 had the weakest growth in Google Cloud revenue since at least the first quarter, with a 22.5% increase to $8.41 billion. In contrast to an operational loss of $440 million a year earlier, the cloud segment posted an operating income of $266 million. Wall Street anticipated $8.62 billion in cloud computing sales.

The third-quarter cloud rise is attributed to “customer optimization efforts,” according to Finance Chief Ruth Porat during a conference call on Tuesday. She did not provide any details.

In contrast, LSEG data revealed that Microsoft’s Intelligent Cloud division, home to the Azure cloud computing platform, saw sales increase to $24.3 billion from analysts’ projected $23.49 billion. Compared to a 26.2% growth prediction from market research company Visible Alpha, Azure sales increased by 29%. Shares of Microsoft increased 5% after hours.

“Despite Alphabet topping quarterly earnings and revenue estimates, investors were disappointed by the relatively weak performance at its Google cloud platform, which is at risk of falling further behind Azure and AWS,” Jesse Cohen, a senior analyst at Investing.com,
Although spending on advertising has been robust in several industries, like travel and retail, industry executives and analysts have observed a reduction in expenditures in certain areas, impacting Alphabet’s primary income stream.

In the third quarter, the company’s ad revenue was $59.65 billion, up from $54.48 billion in the same period last year. The average revenue expectation of analysts for its advertising division was $59.12 billion. YouTube advertisements, a division of the firm that deals with advertising, generated revenue of $7.95 billion instead of $7.07 billion the year before.

For the July–September quarter, Alphabet recorded a net profit of $19.69 billion, up from $13.91 billion in the same period last year.

LSEG data shows that revenue for the quarter ended September 30 was $76.69 billion, below projections of $75.97 billion.

Google reported that its third-quarter capital expenditures of $8.06 billion were “overwhelmingly” due to improvements in its technological infrastructure. According to Porat, the greatest component was servers, which data centers followed as a result of a notable rise in expenditures in AI computing.

More than 12,000 workers, or around 6% of Alphabet’s worldwide workforce, were let go earlier this year as part of a staff reduction drive motivated by a “different economic reality.” In September, the business also let go of staff members from its international hiring division.

The business revealed that for the first nine months of the year, it incurred $2.1 billion in severance and associated expenditures.