The Half-Trillion-Dollar Quarter: Three Stanford Alumni and the Arithmetic of Alphabet’s AI Bet

Alphabet’s third quarter came in at $127.6 billion in revenue, up 25 percent from a year earlier. Multiply by four and you get the line Sundar Pichai led with on Oct. 28: “We had a strong quarter and are now on a half-trillion dollar revenue run rate.” The arithmetic holds. Then the stock fell more than 10 percent, CNBC reported, after the company missed Wall Street on both the top and bottom lines for the first time in nearly four years.

Both readings are accurate, and the gap between them is the story. The quarter belongs to Stanford alumni in an unusually literal way. Pichai, the chief executive, earned his master’s in materials science and engineering at Stanford in 1995. Thomas Kurian, who runs Google Cloud, the one division that beat estimates, is a 1994 graduate of the Graduate School of Business. Ruth Porat, Alphabet’s president and chief investment officer, took her bachelor’s degree on the Farm in 1979. The company itself began as a Stanford graduate-student project, so the campus has a standing interest in how this turns out.

The numbers, as filed

Start with the earnings release Alphabet filed with the SEC. Google Services, the search and YouTube engine that still produces three-quarters of revenue, brought in $96.3 billion, up 11 percent. Search and other advertising was $63.35 billion, up 12 percent, and Pichai said query growth was the highest in five years. YouTube advertising added $11.2 billion. Operating income was $40.58 billion, a 31.8 percent margin.

Net income was another matter. It came in at $26.17 billion, or $2.12 a share, against $34.98 billion and $2.87 a year earlier, a drop of about 25 percent. Much of that is not operations. According to CNBC, Alphabet’s equity holdings, including its stakes in SpaceX and Anthropic, swung to an $8.66 billion loss in the quarter after a $99.03 billion gain in the second quarter. On the adjusted figure analysts track, earnings were $2.67 a share against a $3.02 consensus, and revenue of $127.58 billion trailed the $128.22 billion estimate, per LSEG data cited by CNBC. Search revenue missed too, at $63.35 billion against an expected $64.96 billion.

Pichai’s case for patience rests on usage. He said the Gemini app has reached 1 billion users, calling it “the fastest-growing product in Google’s history,” and that Alphabet’s first-party models now process nearly 32 billion tokens a minute through its APIs.

Kurian’s division doubles

The cleanest line in the release is Google Cloud’s. Revenue was $30.7 billion, up 103 percent from $15.16 billion a year earlier. Operating income was $11.1 billion, a 36.2 percent margin, up from 23.7 percent. Cloud is now about 24 cents of every Alphabet revenue dollar. “The cloud business was the only business that beat at 103% growth,” Jefferies analyst Brent Thill told CNBC. “Everything else missed.”

Kurian made his first public remarks on an Alphabet earnings call this quarter. “We are seeing extraordinary demand and strong growth from both AI labs, capital markets, financial service institutions, and enterprises,” he said, as quoted by CNBC. According to the call transcript published by The Motley Fool, Cloud’s backlog stands at $561 billion, with just over 55 percent expected to turn into revenue within 24 months. That is roughly $309 billion of contracted work over two years, against a division now running at about $123 billion a year.

Kurian came to Google in late 2018 after 22 years at Oracle. He holds an engineering degree from Princeton and graduated from the GSB as an Arjay Miller Scholar, the distinction for the top 10 percent of the class, according to his GSB alumni profile. He has also served on the school’s advisory council.

The bill for the buildout

What frightened the market sits in the cash-flow statement. Alphabet reported negative free cash flow of $9.07 billion for the quarter, according to CNBC, against analysts’ expectations of positive $2.70 billion. Capital expenditures were $51.36 billion, slightly below the $55.09 billion estimate. The company held its full-year capex guidance at $195 billion to $205 billion and said spending will top $300 billion in 2027. “We continue to expect our capex to increase significantly in 2027,” said finance chief Anat Ashkenazi.

The money is increasingly borrowed. Long-term debt reached $125.1 billion, up from $21.6 billion a year earlier, CNBC reported. That is nearly six times as much in twelve months.

Porat’s portfolio

Ruth Porat built Alphabet’s reputation for spending discipline as chief financial officer from 2015 to 2024. Since September 2023 she has been president and chief investment officer, a role her World Economic Forum biography says covers the company’s investment arms GV and CapitalG, the Other Bets, real estate and philanthropy. Those businesses were busy this quarter. Other Bets brought in $372 million in revenue and lost about $2.0 billion at the operating line as Waymo expanded, according to the release. The equity portfolio supplied the quarter’s biggest swing in either direction.

Porat studied economics and international relations at Stanford, then earned degrees from the London School of Economics and Wharton. She served a decade on Stanford’s Board of Trustees and sits on the board of the Stanford Management Company, which invests the university’s endowment.

The Commencement speaker’s ledger

Pichai gave Stanford’s Commencement address on June 14, Stanford Report noted when he was named. He came to Stanford with an engineering degree from IIT Kharagpur and later added a Wharton MBA. He now runs a company of 204,757 employees whose operating business is growing at its fastest pace in years, and whose shareholders want to know when the spending stops climbing.

The release reports a 13th straight quarter of double-digit revenue growth. CNBC reports a $9 billion cash shortfall. The 2027 capex number answers neither, and the next three quarters will show whether Kurian’s backlog turns into cash as fast as the company is spending it.

Photo: Lukasz Kobus / European Commission, via Wikimedia Commons, CC BY 4.0. Sundar Pichai at the European Commission in Brussels, May 2023.