Shares of Alphabet, the parent company of Google, fell sharply on Wednesday after the tech giant warned that its third quarter margins will be crimped due to rising costs and investments in its cloud business.
Alphabet’s stock dropped more than 5% in after-hours trading following the company’s announcement that it expects operating margins to be lower than previously anticipated. The company cited increased spending on its cloud computing business, as well as investments in data centers and hiring more salespeople for its cloud division.
Alphabet CFO Ruth Porat highlighted the increased competition in the cloud computing market as a key driver of the higher costs. “We continue to see strong demand for our cloud services, but competition is intensifying and that is putting pressure on margins,” Porat said in a statement.
The news of Alphabet’s margin warning comes at a time when investors are already on edge about the impact of rising costs on the company’s bottom line. Alphabet has been facing increasing scrutiny over its spending habits and the lack of transparency around its investments in other businesses, such as its self-driving car unit Waymo and its healthcare technology arm Verily.
Despite the margin warning, Alphabet reported strong revenue growth in the third quarter, with total revenue increasing by 20% to $46.2 billion. The company also saw a significant increase in its cloud revenue, which grew by 45% year-over-year to $4.4 billion.
Analysts remain divided on the impact of Alphabet’s margin warning on its long-term prospects. Some believe that the company’s continued investments in its cloud business will pay off in the long run, while others are concerned about the potential impact on profitability.
Alphabet’s stock has been on a rollercoaster ride in recent months, as investors weigh the company’s growth prospects against its rising costs. The company’s shares are down about 10% year-to-date, compared to a 20% gain for the broader tech sector.
As Alphabet continues to navigate the challenges of the increasingly competitive cloud computing market, investors will be closely watching its upcoming earnings report for further insights into the company’s financial health and future prospects.