Alphabet Set to Report Q2 Earnings: Analyst Sees Strength in Search and AI Investments
Alphabet, the parent company of Google, is set to release its second-quarter results after the market closes on Tuesday, July 25th. The report will be closely watched by investors as it marks the first major earnings release from an AI stalwart this season. Analysts are expecting strong performance, with average estimates projecting earnings per share (EPS) of $1.85 and revenue of $84.20 billion. This represents a significant increase from the $1.44 EPS and $74.60 billion in revenue reported in the year-ago quarter.
Key Takeaways:
- Wedbush analyst Scott Devitt reiterates an Outperform rating and $205 price target for Alphabet, citing continued strength in Google Search. The analyst expects search revenue to grow by 12.8% in Q2 to $47.75 billion, driven by sustained spending intent.
- Devitt expects operating income to exceed consensus estimates by about 2%, with operating margins reaching 31.7% due to ongoing cost controls and efficiency.
- The analyst highlights the growing importance of AI investments and will be closely watching operating expense and CapEx growth related to these efforts. He also anticipates increased monetization of AI services within Alphabet’s cloud unit.
- Alphabet’s Class A shares rose 1.43% in premarket trading on Monday, reflecting optimism ahead of the earnings release. The stock has already seen a strong year-to-date performance, rising over 27%.
Google Search Remains a Key Driver
The analyst’s positive outlook is driven primarily by the continued strength of Google Search. Wedbush’s ad survey and agency commentary indicate sustained demand for search advertising, a major revenue driver for Alphabet. Devitt’s raised Google Search revenue growth estimate reflects this positive outlook.
While the analyst expects a slight sequential deceleration in search revenue growth, he emphasizes that the full-year outlook remains strong, based on the survey findings. This suggests that Google’s dominance in search continues to attract advertisers and drive significant revenue for the company.
AI Investments Are a Growing Focus
Alphabet has been aggressively investing in AI, particularly with the launch of Bard, its conversational AI chatbot, and the integration of AI capabilities across its products and services. Devitt anticipates a significant increase in operating expenses and capital expenditures (CapEx) as these investments continue to scale.
The focus will be on how these AI investments are translating into tangible results. Investors will be looking for evidence of continued progress in monetizing AI services within the cloud unit and other areas.
Second Half Outlook: Balancing Growth and Competition
While the first half of 2023 has been strong, the second half will likely face tougher comparisons due to the resurgence of economic activity in the post-pandemic period. The analyst will be watching for insights into Alphabet’s advertising growth trajectory in the second half, particularly in light of potential economic headwinds.
The competitive landscape is also becoming increasingly complex, with players like Microsoft making significant investments in AI tools and services. Alphabet will need to demonstrate its ability to maintain its market leadership in areas like search and cloud computing while innovating effectively in the rapidly evolving AI space.
Key Areas to Watch in the Earnings Report:
- Advertising Revenue Growth: Investors will be watching for advertising revenue growth rates, especially as comparisons become more challenging in the second half of the year.
- Operating Expense and CapEx: The report will shed light on Alphabet’s investment strategy in AI, with investors seeking insights into how these investments are impacting expenses and capital expenditure.
- Monetization of AI Services: Alphabet’s progress in monetizing AI services, particularly within the cloud unit, will be an important indicator of its ability to leverage its AI expertise for revenue growth.
- Cloud Unit Performance: The cloud unit has become a significant growth driver for Alphabet, and investors will be eager to see how its performance is holding up in a competitive environment.
Overall, Alphabet’s second-quarter earnings report is likely to provide a valuable glimpse into the company’s performance and its strategic direction in the evolving digital landscape. The report is expected to address key areas like the strength of Google Search, the impact of AI investments, and the company’s outlook for the second half of the year.
