Search (56% of their revenue) came in slightly ahead of plan, up 12% y/y versus the Street’s 11%. The results had a unique significance, given this was the first full quarter of AI Overview in the US. The results represented the first tangible evidence that the company is on track to successfully navigate the transition from static ten blue links to generative search while maintaining its user base against a barrage of new competitors, including ChatGPT and Perplexity.

An additional data point that suggests success with AI overviews was the overall US business slightly accelerated to 19% y/y, versus 18% y/y in Jun-24, well ahead of the Street was expecting only 12% growth. I believe this improvement could only have happened if AI Overviews are having a positive impact on Search monetization. While the US number includes all business segments (e.g., YouTube, Cloud, etc.), it remains an encouraging sign for the growth out as the overview feature gets rolled out to more countries in the coming months.

CEO Sundar Pichai added:

“We are seeing string engagement, which is increasing overall Search usage and user satisfaction. People are asking longer and more complex questions and exploring a wider range of websites. What’s particularly exciting is that this growth actually increases over time as people learn that Google can answer more of their questions. The integration of ads within AI Overviews is also performing well, helping people connect with businesses as they search.” – Sundar Pichai

Fundamentally, AI overviews are changing the way people search and ask questions. In late October, AI Overviews were rolled out to over 100 countries, expanding the reach outside the US. This is an encouraging sign because about 1B people around the world will now experience AI Overviews, meaning the company is confident in this approach and maintaining search revenue.

Google Cloud Platform (GCP) showed a surprising acceleration to 35% y/y from 29% in the June quarter, and ahead of the 29% Street expectation. As a point of reference, Azure grew at 33% while AWS grew at 19%. This means that Google is adding to its market, which should be expected given that it holds the smallest market share.

The two takeaways:

First, AI is driving growth for Google. The debate about where we are seeing AI monetization has stopped at the hyperscalers, all of which reported favorable profits and growth metrics in cloud driven by AI spend.

Second, AI is just starting. It’s clear by Google’s, Azure, and AWS results that developers are investing heavily in AI, and much of the industry’s growth is coming from this area. Concerns about AI slowing down don’t align with the Cloud growth numbers.

Google’s CapEx numbers stood out in a slightly negative sense relative to the overall AI momentum. Google guided for December CapEx to remain at $13 billion, up around 18% y/y, unchanged from September. This marks a sharp deceleration compared to the June quarter where CapEx saw a significant 91% y/y increase. My sense is that in 2025 CapEx growth will rise slightly to 20%. While these investment growth rates are well below the rest of other big tech (with the expectation of Apple), increasing investment in a segment by 20% y/y should still be considered an area of focus.

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