Alphabet, the parent company of Google, announced on Tuesday that its investments in artificial intelligence are yielding positive results, highlighted by a 35% increase in its cloud business and a boost in YouTube ad revenue due to U.S. election-related spending during the third quarter.

Following the announcement, Alphabet's shares experienced a nearly 6% rise in after-hours trading. In contrast, shares of leading cloud competitors Amazon and Microsoft saw a modest increase of about 1%.

The company exceeded expectations for both revenue and earnings in the third quarter. Its core Search business also saw a 12% increase, along with a similar rise in YouTube ad revenue.

"Alphabet is the first major technology firm to release its earnings, and it has certainly met expectations," remarked Matt Britzman, a senior equity analyst at Hargreaves Lansdown. "The strong growth in the cloud sector reinforces the notion that major cloud providers are well-positioned to capitalize on the AI revolution."

Despite being perceived as lagging behind Microsoft in the AI sector, Google has been enhancing its Gemini AI chatbot and refining its AI-driven Search capabilities.

The company continues to invest heavily in AI initiatives.

Anat Ashkenazi, the new chief financial officer, who was on her first analyst call, indicated that Alphabet's capital expenditures for 2025 are projected to exceed those of this year.

In the third quarter, Alphabet's capital expenditures surged by 62% to reach $13 billion, with expectations for a similar trend in the fourth quarter.

Some analysts noted that Alphabet's performance this quarter appeared strong relative to low expectations, suggesting that its modest but expanding cloud business could gradually compensate for a slowing advertising sector.

Google's long-standing leadership in the digital advertising market faces challenges from Amazon and TikTok, which have gained traction among advertisers eager to reach a ready audience. Additionally, its Search business is under scrutiny from regulators aiming to dismantle the company.

Nonetheless, its cloud business achieved its fastest growth in eight quarters, reaching $11.35 billion, driven by enterprises increasing their cloud investments, which are crucial for supporting artificial intelligence technologies. Analysts had estimated revenue of $10.86 billion.

"I do think it was an impressive quarter because the fact that Google Cloud could more than offset Search decline speaks both to the growing importance of cloud revenues and the fact that the company continues to diversify its revenue base," said Bob O'Donnell, president of TECHnalysis Research.

Google has introduced advertisements in AI Overviews, utilizing generative AI to condense information from various sources and present succinct results for search inquiries.

Analysts have noted that users perceive the company's new AI features as more effective than before, marking a notable enhancement from earlier this year when the tool faced significant backlash for providing incorrect information, such as a pizza recipe that included glue as an ingredient.

Alphabet also surpassed profit forecasts, reporting earnings of $2.12 per share, exceeding the average market prediction of $1.85, as per LSEG data.

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"We had a slight tailwind from election-related ad spend in the third quarter, which was a little bit more pronounced in YouTube ads," Google's chief business officer, Philipp Schindler, said on a post-earnings call.

Snap, a social media platform reliant on advertising, delivered positive news for its investors by exceeding Wall Street expectations for quarterly revenue and user growth, resulting in a 6% increase in shares during after-hours trading.

Alphabet's digital advertising revenue, which constitutes the largest portion of its overall income, grew by 10% to $65.85 billion in the third quarter. However, this growth rate has decelerated compared to the second quarter.

"I completely expect Google to start losing share in the ad market over the next two to three years," said Angelo Zino, senior equity analyst at CFRA Research. "Clearly, as we kind of move towards more of an AI-driven market, there's going to be increasing competitive pressures out there as a result."

Data from eMarketer indicates that Google's share of U.S. search advertising revenue is projected to dip below 50% next year, marking the first decline in at least 18 years. In contrast, Amazon's share is anticipated to rise from 22% to 24% this year.

Alphabet's total revenue rose by 15% to $88.27 billion during the July-September period, surpassing analysts' average expectation of $86.30 billion, according to LSEG data. The advancement of the company's smartphone launch this year contributed to the revenue increase.