Alphabet's Q2 Earnings Preview: Strong Growth Expected Amid AI Focus and Ad Market Recovery

What to Expect From Alphabet's Upcoming Q2 Results | Investing.com UK

On Tuesday, July 23rd, Alphabet (NASDAQ:GOOGL) is scheduled to release Q2 2024 earnings ending June. Year-to-date, GOOGL shares are up 31%, sandwiched between its main competitors, Microsoft (NASDAQ:MSFT) (up 19%) and Meta Platforms (NASDAQ:META) (up 40%). For the quarter, average earnings per share estimate is holding at $1.85, down from $1.89 in the first quarter, while the average revenue estimate is projected at $84.21 billion. For comparison, Alphabet ended Q1 with $80.54 billion revenue, up 15% year-over-year. Out of that figure, $70.4 billion came from Google Services. In Q1 earnings, the company reported $23.6 billion net income, which is now expected at $23 billion for Q2. Although the ad business remains the company's main revenue generator in its Google Services division, Alphabet has expanded into hardware (Pixel, Nest, Fitbit), autonomous vehicles (Waymo), high speed internet and AI development. Given AI's hype in the last two years, much is expected of Google's AI integration as the main valuation driver moving forward. But how can Alphabet outpace Microsoft as the first-mover, owing to its partnership with OpenAI and Azure cloud integration? Alphabet's bottom line relies on the feedback loop between global search engine dominance and ad revenue, at 91.06% vs 58% market share respectively. For comparison, Amazon (NASDAQ:AMZN) and Baidu (NASDAQ:BIDU) are estimated to have 14% and 15% share of global search advertising revenue respectively, according to Statista Market Insights. This enormous network effect gives Alphabet a wide moat status, as a fertile ground to plug in other products and expand the company's ecosystem of services and apps. However, Google Cloud is ranked third as a cloud infrastructure vendor. At 10% market share, Google Cloud is behind Amazon Web Services (AWS) at 31% and Microsoft Azure at 25% market share. This is indicative of Alphabet's lagging AI posture, as both Microsoft and Amazon have built extensive partnerships to bundle up their cloud services with AI. Moreover, the Gemini launch debacle showcased to investors that Alphabet is heavily ideologically bound, instead of prioritizing accuracy and usefulness to the end-user. With that said, there are signs that Alphabet could deepen its moat further. As first reported by the Wall Street Journal, Alphabet is negotiating the acquisition of cybersecurity firm Wiz, purportedly worth around $23 billion. Similar to Broadcom Inc's (NASDAQ:AVGO) acquisition of VMware (NYSE:VMW) for $69 billion, this would open the door for Google's stake in the cloud-native security arena. Like recently embarrassed CrowdStrike (NASDAQ:CRWD) Wiz offers real-time threat detection, vulnerability analysis, AI-powered automation of tasks and seamless integration into all major cloud service providers. If it goes through, Wiz acquisition would boost Alphabet's Mandiant cybersecurity platform, acquired by Alphabet in September 2022 for around $5.4 billion, currently ranked 23rd at 0.37% market share in the cybersecurity category. According to insider sources reported by Android Authority, Alphabet plans to integrate AI even more with the upcoming Google Pixel 9 series in the smartphone arena. The "Google AI" suite of services would include the existing Gemini as built-in AI assistant and Circle to Search feature. Three new features of Google AI are purportedly "Add Me" as AI-assisted and automated photo manipulation, "Studio" as all-in-one AI image generator similar to Apple's Image Playground, and "Screenshots" similar to Microsoft's controversial Recall feature for upcoming Copilot Plus PCs. Investors should take note that Alphabet is notorious for ditching projects and features. Case in point, when the company acquired Fitbit for $2.1 billion in January 2021, the fitness device became superfluous alongside Google Pixel Watch. Moreover, Fitbit Versa 4 and Sense 2 lost third-party app support. In other words, it appears that Alphabet used up Fitbit for data collection purposes, then shifted to a new product while abandoning its existing user base. This reflects Alphabet's wide moat status in which experimentation is prioritized over following through on a product. This tendency is so prevalent that a dedicated site called "Google Graveyard" was created, currently listing 295 abandoned projects. Although the company can afford such an approach, it doesn't inspire confidence with enterprise-grade customers, making AWS and Azure ahead of the cloud game. Still, the company showed it is catching up in Q1 earnings. Google Cloud generated $9.57 billion revenue, up 28.4% from the year-ago quarter. While Microsoft Cloud generated three times as much, at $31.8 billion, the revenue growth is "only" 23% year-over-year. Presently priced at $181.44, GOOGL stock is slightly under its 52-week high of $191.75, while 23% above its 52-week average of $147.54 per share. According to 40 analyst inputs aggregated by Nasdaq, average GOOGL price is $202.89 twelve months ahead. The optimistic ceiling is $240, while the estimated bottom is not that far from the current price, at $170 per share. ***

Alphabet's ad sales, CapEx and GenAI in focus during Q2 earnings (NASDAQ:GOOG)

When Alphabet (NASDAQ:GOOG) reports second quarter results on Tuesday, investors expect to see strong advertising growth from the tech giant, along with benefits from early adoption of artificial intelligence. Wall Street expects the Google parent to post Q2 EPS of $1.84 on revenue of $84.26 billion, implying a rise of 12.95% year-over-year. Alphabet's Google and YouTube face competition from other platforms including Meta, TikTok and Amazon when it comes to advertising budget, especially amid a low spending environment. But, a double-digit rise in YouTube ads sales during the first quarter calmed market watchers. The broader strengthening of the online advertising environment, along with Google's dominance in the space and inclusion of AI-powered features should help the company maintain ad sales growth, analysts noted. Citi analyst Ronald Josey said Alphabet's results are likely to be better-than-consensus-expectations across both revenue and OI. The brokerage projects Q2 YouTube revenue +17.5% Y/Y vs. consensus +15.3% Y/Y and noted ramping engagement. Investors would want updates on antitrust issues and the company reportedly buying cybersecurity startup Wiz for ~$23B during the earnings call. The company's capital expenditure would also be in focus, given its investments on GenAI to compete with Microsoft and Meta Platforms. Barclays Capital recently trimmed estimates for Alphabet, Meta and Amazon.com, on increased depreciation expense, amid the costs related to AI, even though it is broadly bullish on AI and on the mega cap names heading into second quarter earnings. Over the last two years, Alphabet has beaten EPS estimates 38% of the time, while it has beaten revenue estimates 63% of the time. Seeking Alpha analysts and Wall Street are bullish and rated the stock as Buy. However, Seeking Alpha's Quant ratings consider it a Hold, with a score of 3.49 out of 5, dragged down mostly by valuation. Over the last three months, EPS estimates have seen 32 upward revisions and no downward revisions. Revenue estimates have seen 27 upward revisions versus three downward moves. The stock has grown over 30% so far this year, outperforming the nearly 19% rise in the broader S&P500 Index.

Alphabet Set To Report Strong Q2 Results With Increased Search Revenue: Analyst Bullish On Google Parent Flags 3 Things That Will Be On His Radar - Alphabet (NASDAQ:GOOGL)

An analyst says survey results have increased his conviction in spending intent for the full year. Alphabet, Inc. GOOGL GOOG is scheduled to release its second-quarter results after the market close on Tuesday, and ahead of the release, a bullish analyst reiterated his positive stance. The Google parent is the first AI stalwart to report this earnings season and therefore, all eyes will be riveted on the report. Analysts, on average, expect the company to report earnings of $1.85 per share compared to the year-ago's $1.44, and revenue of $84.20 billion versus last year's $74.60 billion. The Alphabet Analyst: Wedbush analyst Scott Devitt reiterated an Outperform rating and $205 price target for the stock. The Alphabet Thesis: "The setup remains positive heading into 2Q results," said Devitt, citing findings from the firm's ad survey and agency commentary that pointed to continued strength for Google Search. The analyst said he raised his Google Search revenue growth estimate from 12% to 12.8% to $47.75 billion. Sequentially search revenue is now expected to see a more modest sequential deceleration in growth, he added. The survey results have increased conviction in spending intent for the full year, the Wedbush analyst said. See Also: Best Communication Services Stocks Devitt expects operating income to exceed consensus estimates by about 2%. "With cost controls still in place, we expect continued operating margin expansion in 2Q," he said, adding that operating margin will likely come in at 31.7% versus the 31.1% consensus estimate. The analyst said the chances of seeing a negative surprise related to spending are relatively low in the second quarter as the increased capital intensity is better understood and estimates for depreciation & amortization and capex have risen materially following guidance last quarter. Devitt said he would focus on the following: operating expense and CapEx growth related to AI investments 2H advertising growth as comps become more challenging ongoing monetization of AI services within the cloud unit Alphabet Price Action: Alphabet's Class A shares listed on the Nasdaq rose 1.43% to $180.20 in premarket trading on Monday, according to Benzinga Pro data. The stock is up over 27% for the year-to-date period. Read Next: Google Parent Alphabet's Q2 Expected To Shine With AI, YouTube Shorts, Cloud Strength: Analyst Image Via Shutterstock Market News and Data brought to you by Benzinga APIs

Alphabet to report double-digit Q2 growth; AI adoption, ballooning costs in focus

July 22 (Reuters) - Google-parent Alphabet is expected to report a nearly 14% rise in quarterly revenue, its fourth straight quarter of double-digit growth, driven by steady demand for its artificial intelligence-powered cloud computing services and an uptick in the ad market. The search giant's second-quarter report on Tuesday, the first among the Big Technology companies this season, could offer further insight into the uptake of AI services, as well as the rising costs associated with the new technology. At a developer conference in May, Google widely rolled out AI-powered summaries in Search and beefed up its Gemini AI model to better compete with services from OpenAI and Microsoft . Google is also launching new Pixel devices with AI capabilities next month, moving forward its unveiling event, typically set in fall, after Apple announced in June a slew of AI capabilities and an integration with ChatGPT in the latest iPhones. "Investors will be looking for continued success in Search, but also for signs of the company adapting to the new world of AI," said Gil Luria, senior software analyst at D.A. Davidson & Co. "The company will need to show that AI is driving Google Cloud growth, that there are no share losses in Search as users start leaning more on AI chat, and that the new models being built are competitive." Alphabet's AI investments will also be closely watched. In the January-March period, the company's capital expenditure jumped 91% to $12 billion, rattling some investors even though CEO Sundar Pichai assured that the AI integrations were boosting demand for its cloud and search businesses. The company's operating expenses in the second quarter ended June likely rose more than 32% to $27.57 billion, according to LSEG data, the highest jump in over two years. Investors will also have questions around reports that Alphabet is in talks to buy cybersecurity startup Wiz for roughly $23 billion and how that would affect its bottomline. Alphabet's core businesses are likely to report healthy growth as an improving macro-economic climate gives customers the confidence to invest in cloud computing and spend on advertising. "Google search spending still held up fairly well ... we think advertisers need to spend as a key offset to inflation," said RBC Capital Markets analyst Brad Erickson. Media investment firm GroupM raised its 2024 global advertising growth forecast to 7.8% in June, from 5.3% in December, primarily on account of better-than-expected spending in China and the United States. Analysts also expect strong performance at YouTube, thanks in part to expanded monetization features in its TikTok-styled video offering, Shorts. Alphabet's second-quarter cloud computing sales and advertising revenue are expected to grow 26.4% and 10.8%, respectively, according to LSEG data, largely similar to the preceding two quarters. Ad-dependent peer Meta Platforms will report its results next week on Wednesday, July 31. (Reporting by Yuvraj Malik and Priyanka G in Bengaluru; Editing by Sayantani Ghosh and Shinjini Ganguli)

Google: The Pros And Cons For A Post-Q2 Share Price Surge (NASDAQ:GOOG)

Overall, I remain "Buy" rated on Google stock, and continue to view shares as undervalued Alphabet Inc. (Google) (NASDAQ:GOOG) (NASDAQ:GOOGL) is set to report earnings for the June quarter on July 23rd, after the market closes. The last time Google reported earnings, shares surged as much as 15% in after hours trading, given a strong consensus earnings beat. Now, looking to Q2, should investors expect another earnings beat and share price surge, similar to the one seen in Q1? In this article, I discuss the pro and contra argument for a post-Q2 share price surge similar to post-Q1. On the pro side, I see strong commercial momentum for Search, YouTube and Cloud, likely setting up for a notable topline beat, while on the contra side I view limited capital distribution upside and cost pressure as headwinds. Noting the share price momentum, Google stock has significantly outperformed the market year-to-date. Since the beginning of the year, GOOG shares have increased by approximately 27%, whereas the S&P 500 (SP500) has gained about 15%. Google's advertising business, including Search and YouTube, is the company's main cash generation engine. On that note, I am highly optimistic that we can expect a strong YoY growth momentum in Q2, building on trends seen in Q1. While Google, did not give guidance for ad sales in the June quarter, I argue that the Google's advertising business is affected by similar drivers as Meta's, who guided for a 7% QoQ jump in ad sales at the high end of the projection. I am also encouraged by positive feedback from industry channel checks. After speaking with six market participants who control advertising budgets, primarily from SME businesses, I estimate that year-over-year advertising spend on a macro level in Q2 2024 may increase by as much as 15% YoY. Accordingly, a 4-6% QoQ growth for Google should be possible - in fact, conservative. This would mean that Google's advertising business should generate about $75-77 billion of revenue in the June quarter, well ahead of consensus estimates of about $74 billion, according to data collected by Refinitiv. The economic backdrop for Google's Cloud business is firing from all cylinders - according to a Jefferies survey of 40 CIOs, cloud spending intentions are accelerating. Notably, 43% of respondents expect their cloud spending to increase by more than 10% in 2024, up from 28% who anticipated such an increase in 2023. The survey also indicates a significant ongoing shift in workloads to the cloud, with 58% of CIOs expecting over 50% of their workloads to be cloud-based by the end of 2025, compared to 36% today (Source: Jefferies research note on Cloud survey, dated 8th July). As the leading cloud company globally, Amazon is well-positioned to benefit from these favorable cloud spending trends. Looking ahead to Q2, Google Cloud is well-positioned to maintain its growth trajectory seen in March quarter, as the company's ongoing investments in AI, machine learning, and infrastructure are expected to drive further adoption of GCP services. In my view, revenue from GCP should top $10 billion in Q2, projecting a 25% YoY growth vs. the same period one year earlier. On that note, although my projection aligns with consensus, I still see upside to sentiment for GCP, as a ~25% YoY growth rate on a ~10 billion business would offer an enormous proof-point for Google's economic potential beyond Search and advertising. I am very bullish on Google's YouTube business, and I believe Q2 will underscore the platform's potential to compete with Instagram and TikTok. In my view, the platform's strategic shift to focus increasingly on short-form video content, particularly through YouTube Shorts, has been a major driver of strengthening engagement. In fact, as evidenced already in Q1, shorts have contributed to the substantial rise in impressions, helping to attract a younger demographic and increasing overall user time spent on the platform. Discussing YouTube's competitive strength vs. Social Media companies, I also highlight that YouTube remains capable to effectively compete with entertainment giants like Netflix. In fact, in Netflix' most recent earnings report, management indirectly acknowledged YouTube as its biggest competitor for user attention, with YouTube claiming close to 10% of the TV screen time in the U.S., ahead of Netflix. Financially, I expect that YouTube's advertising spend has seen a substantial increase in Q2, with a YoY growth rate similar to GCP at around 25%. This sharp acceleration in ad spend is primarily due to better impression growth (up >20% YoY), but also a slight YoY increase in CPMs (Cost Per Mille, projected to be up 5% YoY). While Google's momentum on the topline looks very strong, I am slightly concerned about the company's ability to focus on costs and operational efficiency. Specifically, I project that operational expenses for Google in Q2 have been rising notably vs. Q1, driven by several factors including increased costs for personnel, data center operations, and technology development. On that note, the company's operational expenses have been impacted by higher salaries and benefits to attract and retain top talent in a competitive market. Additionally, the costs associated with running vast data centers, which are essential for its core services like search and YouTube and GCP. Moreover, Google's ongoing investment in technology and innovation is another significant area of cost pressure: The integration of AI across its product lines, including search enhancements and cloud services, requires substantial R&D. Moreover, the development and deployment of large language models and other AI technologies necessitate continuous funding, negatively affecting operating income and free cash flow. Personally, I model that Google's operating margin will be down 50-100 bps. compared to Q1, which suggests an operating margin of around 31%. This should bring operating income to $25-26 billion, and operating income growth YoY to 17-18%. Google's commitment to maintaining and expanding its technological edge also extends to CAPEX, which adds another layer to FCF pressure. The company's investments in data centers, servers, and networking equipment are essential to support its cloud services and AI initiatives. The ongoing investment cycle suggests that less capital will be available for shareholders. While the pace of buybacks is projected to be maintained at high levels, the path/ rate of change for the future is shifted to the downside. On that note, I point to a Wells Fargo research note on Google dated July 7th, which highlights that buybacks as a percentage of FCF has peaked in FY 2022 Google is set to report earnings for the June quarter on July 23rd, after the market closes. In the previous earnings report, shares surged by as much as 15% in after-hours trading due to a strong consensus earnings beat. Looking ahead to Q2, I am optimistic that markets will react positively to Google's earnings report, but the backdrop for another post-earnings share price surge is nuanced: On the positive side, there is strong commercial momentum for Search, YouTube, and Cloud, likely setting up for a notable topline beat. On the negative side, limited capital distribution upside and cost pressures may act as headwinds. Overall, I remain "Buy" rated on Google stock, and continue to view shares as undervalued <$200 - see my valuation framework for Google here.

Google Q2 Preview: Becoming The AI Leader (NASDAQ:GOOG)

Current EPS estimates for the upcoming quarter show strong growth estimates, making me reiterate my strong buy belief. Initially, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (NEOE:GOOG:CA) struggled to position itself in the AI market post ChatGPT launch because it was overshadowed by its rivals such as Microsoft (MSFT). However, I believe with their recent advancements, particularly the introduction of the Gemma 2 model, the company has turned around their AI prospects. I think they are now either at or quickly becoming the market leader. Gemma 2, which was launched in June, is available in 9 billion (9B) and 27 billion (27B) parameter sizes. Google claims it delivers class-leading performance that outpaces competitors of similar and even larger sizes. In my opinion, Gemma 2 marks Google's transition from merely surviving in the very competitive AI industry to setting a new standard for open models in terms of performance and cost-efficiency. Google DeepMind also unveiled a new AI training method named JEST, which the company claims to enhance performance by 13 times and improves power efficiency tenfold compared to existing methods. This was introduced this month to reduce computing costs and energy consumption, which is needed for sustainable AI development and its applications in eCommerce and global customer support I think that Google's initiatives now offer optimism among investors. While their models do not still benchmark closely to OpenAI's latest models or Anthropic's Claude, the company's shift towards actively leading in AI innovation is a clear indicator that they have not only caught up but are now ahead in the AI market. I'll talk about this later, but their market share is catching up as well. Alphabet's financial performance reflects these technological strides. As of mid-July, the company's stock surged 27.18% year-to-date, bolstered by robust advertising growth and AI integrations that maintain its market dominance. Alphabet's Q1 results showed a 28% increase in Google Cloud's revenue, highlighting the economic impact of their AI advancements I believe this progress supports a bullish outlook on Google's shares, particularly as they head into their earnings reports. The advancements in AI, exemplified by Gemma 2, suggest there is even more upside potential for Google, making a strong case for me. I continue to be a strong buy going into earnings. In my last report, I wrote how Google went from the AI underdog, to now firing on all cylinders. Back then, Gemini 1.5 Pro exemplified Alphabet's progress in AI. CEO Sundar Pichai described the AI transition as a "once-in-a-generation opportunity," highlighting AI-driven enhancements in Search, digital advertising, and cloud computing capabilities. Alphabet's 1Q 2024 results also demonstrated an EPS of $1.89, which exceeded expectations by 25%, and total revenue of $80.54 billion clocking in at 15.41% YoY growth. Google Search and digital advertising generated $61.66 billion, a 13% YoY increase, while Google Cloud revenue rose 28% to $9.6 billion. These gains were bolstered by the integration of AI and machine learning technologies, attracting enterprise customers like Bayer, Cintas, and Walmart. YouTube also saw a 21% YoY revenue increase, driven by innovative ad strategies and the potential user shift from TikTok due to regulatory uncertainties. These innovative ad strategies were also driven by AI. Now the company is starting to pull ahead from a business standpoint, especially with the expected introduction of Gemini 2 later this year. Like many tech companies in the AI space, Google faces challenges in monetizing their AI progress, particularly at the software layer for enterprise applications. The struggle to turn AI hype into profits is rooted in the non-deterministic nature of many AI models and the resulting variability in quality, which can hinder their adoption in enterprise environments. Non-determinism in AI models means that given the same input, the models can produce different outputs. This variability, while potentially beneficial for creativity and innovation, is problematic for organizations that require consistent and reliable performance. For instance, non-deterministic outputs can lead to inconsistent product descriptions, which may confuse customers and damage brand credibility. This unpredictability impact consistency and reliability of output. Many key AI use cases involve being deployed in high trust situations. Alphabet's efforts to monetize their AI innovations are further complicated by the challenges in integrating AI solutions into existing enterprise workflows. Companies are often hesitant to adopt AI technologies that do not guarantee deterministic and high-quality outputs, leading to slower uptake and limited profitability from these innovations. Pressures from investors and the necessity to fund ongoing research have pushed these organizations towards more commercial activities, which can sometimes conflict with their foundational principles of ethical AI use. Google has a rare approach; however, I think this is key. Google (along with Meta (META)) now both employ a classic Silicon Valley strategy of offering valuable services for free or as part of existing premium (or free) subscriptions to hook users and later capture value on the backend. This approach is evident in the company incorporating advanced AI features into their subscription G-Suite services to reflect a shift in their business model. It's definitely a response to competition from AI companies such as OpenAI's ChatGPT. Google's Google One AI Premium plan was launched in early 2024, and offers advanced AI capabilities through the Gemini Ultra 1.0 model. This model, according to the company, allows better handling of complex tasks involving text, images, and code, and is integrated with Google's productivity apps like Gmail and Google Docs. I believe that this strategy allows Google to familiarize users with their AI capabilities and create a dependency on these tools, which can potentially increase the likelihood of long-term subscription renewals. This playbook relies on the resources and extensive user networks of companies like Google and Meta, enabling them to absorb initial costs while establishing an ecosystem that users can be reliant upon. However, this approach is not without challenges. Google's consideration of charging for AI-powered search features reflects the high costs associated with generative AI and the need to find sustainable revenue streams. A recent report from VC firm Sequoia highlights that the AI industry requires an estimated $600 billion in software spend to AI companies to support the necessary upgrades for GPU infrastructure, which is a core component for training and deploying advanced AI models. Google is known for their substantial investments in AI, and is poised to make this expenditure work due to their large financial resources and freemium approach to AI integration. The company's capital expenditures are projected to increase by 33% this year, reaching nearly $43 billion. This investment is necessary since AI models, particularly those leveraging generative AI, demand computational power. Google's infrastructure investments in GPUs are important to maintain their edge in AI and to support the deployment of advanced AI features across their platforms. Google's extensive existing infrastructure through their current search, cloud, advertising, and YouTube platforms plus continuous innovation are key factors driving their market strength in the AI market. Google ranks among the top model providers for enterprise users. Although Open AI dominates the models in production with 66% over Google's 13%, the latter outpaces Open AI in terms of models in testing with 50% compared to Open AI's 34%. Google has a huge opportunity to grow. I believe Alphabet is set to report EPS of $1.84/share and revenue for Q2 2024 of $84.30 billion with earnings on Tuesday (July 23rd), which aligns with the consensus estimates from analysts. This represents a 27.66% year-over-year growth, highlighting the company's robust performance in the face of ongoing market challenges. This growth is driven by the parent company's diverse revenue streams and strategic investments in AI and cloud services. The company's legacy search division is firing on all cylinders. Their cloud division is also accelerating. Now they have a unique AI strategy that is helping as well. Google's strong profitability metrics further support the positive EPS outlook. The company's net income margin stands at 25.90%, higher than the sector median of 3.22%, showcasing Alphabet's superior operational efficiency and profitability. I am on par with the street for estimated EPS should be for the quarter. In addition, their return on equity (ROE) is an impressive 29.76%, far exceeding the sector median of 3.23%, indicating effective management and strong shareholder returns. Not only as an innovator, I also believe Google and their management are effective capital allocators. On Google's next earnings call, I'm focusing my attention on qualitative examples of the company generating strong AI use cases with clients that demonstrate practical, scalable applications of their technology. Google's efforts in AI have already led to partnerships and real-world implementations across numerous industries. I expect more of these to be highlighted. For instance, at the Google Cloud Next '24 event, many high-profile organizations showcased how they are leveraging Google's AI solutions. Best Buy (BBY), for example, is using Google's Gemini AI to launch a generative AI-powered virtual assistant to troubleshoot product issues, manage subscriptions, and enhance customer service both in-store and online. Wrapping up my expectations, I'm looking for more examples of companies adopting Google's AI freemium model in their businesses and proving how this is helping them personally as an advantage for their respective businesses. The freemium model, which provides basic services for free while offering premium features at a cost, has been enhanced by AI to drive both user engagement and revenue growth. Google's approach integrates AI into their core offerings so users can leverage their Gemini AI assistant and AI-powered features in services like Gmail and Google Docs, available through the Google One premium subscription. I think this is key. I expect them to talk about this model as well. Google presents a case for a reassessment of their valuation metrics, particularly the PEG non-GAAP forward ratio, currently at 1.32, which differs by -11.51% below the sector median of 1.49. This valuation seems incongruent given the robust EPS growth Alphabet has demonstrated. Specifically, Alphabet's EPS growth forward (FWD) stands at an impressive 23.76%, surpassing the sector median of 7.56% by over 214%. This suggests that the market may be undervaluing Alphabet's EPS growth potential. In addition, as I mentioned before, the company's return on common equity (ROE) further improves their financial performance with 29.76%, which is 791% above the sector median of 3.34%. I believe this indicates that Alphabet is efficient in generating profits from their equity and superior to their peers in the sector. Strong capital allocators are strong shareholder management teams. Given these metrics, I believe Alphabet deserves a premium valuation. If their PEG ratio were adjusted to reflect a 30% premium above the sector median (to reflect part of the incredible EPS growth), rather than the current discount, it would translate to a PEG ratio of approximately 1.95. To quantify this, if we consider the sector median PEG as a baseline and apply a 30% premium, the implied upside in Alphabet's share price would be considerable, or approx. another 47.72% in upside in shares. The company has real growth. I think they have real upside from here. The landmark antitrust trial against Google, which concluded on May 2nd, represents a challenge to the tech giant's business practices. The trial focused on allegations that Google has maintained a monopoly over online search and search advertising through anticompetitive tactics. Central to the case is Google's practice of paying billions to companies like Apple (AAPL) and Mozilla to be the default search engine on their devices and browsers. The Justice Department and a coalition of state attorneys general argued that these payments have unfairly stifled competition, keeping rivals such as Microsoft's Bing and the privacy-focused DuckDuckGo from gaining a foothold in the market. The government claims Google's $26.3 billion expenditure in 2021 alone, with $18 billion going to Apple, was designed to secure its dominance and suppress potential competitors. During the trial, Google defended their practices, arguing that their dominance is due to the superior quality of their search engine rather than any illicit activity. Superior products and business models are not illegal in the US. This is the result of effective capitalism. With this, Google's dominance in search spend remains critical for their business model. According to a report, Google continues to be the top destination for ad spending due to their reach and effectiveness in search advertising. The company's search advertising business, which generates $175 billion annually, is an important source of their revenue stream. Ad spend has increased by 17% as reported early this year. I'm confident that Google has a huge potential to corner the growing AI market in the coming years. Their leadership in AI was recognized in the 2024 Gartner Magic Quadrant for Cloud AI Developer Services. This is in line with their offerings in the AI sector. Initially, I believed Google was struggling to position itself in the AI market because it was often overshadowed by its rivals. However, with their recent advancements, particularly the introduction of the Gemma 2 model, the company has turned around their AI prospects. This development marks Google's transition from merely surviving in the highly competitive AI industry to setting a new standard for open models in terms of performance and cost-efficiency. Recent market share data from A16 shows this as well. At the same time, the main risks associated with Google's business model have dissipated over the past six months, while the opportunities arising from their strategic advancements are expanding. I think this evolution suggests that Google's shares have more room to appreciate despite the recent tech selloff. The pros are increasing, the cons are falling off. Alphabet's financial performance reflects these technological strides, with stronger advertising growth, and a 28% increase in Google Cloud's revenue in 1Q 2024. I believe shares remain a strong buy.

Wedbush says Google search strength continues, raises estimates ahead results By Investing.com

Alphabet (NASDAQ:GOOGL) is set to report its second-quarter 2024 results on Tuesday, July 23, and Wedbush analysts are optimistic about the company's performance. "We think the setup remains positive heading into 2Q results," they noted, emphasizing strong indicators from their ad survey and agency feedback that suggest continued robustness in Google Search. In light of this, Wedbush has increased its Google Search growth estimate for Q2 from 12.0% to 12.8%. They now project Google Search revenue of $48.1 billion, up from the previous estimate of $47.7 billion. This revised estimate is approximately 1% higher than the consensus. Overall, Wedbush expects Alphabet's consolidated Q2 revenue to grow by 13.1% year-over-year, slightly surpassing the consensus expectation of 12.8% growth. Their operating income estimate for the quarter is also about 2% above the Street's predictions. Wedbush anticipates continued operating margin expansion, expecting it to reach 31.7%, compared to the consensus of 31.1%. They attribute this to ongoing cost controls. The analysts acknowledge that while there is always a risk of negative surprises related to spending, particularly for megacap internet companies like Alphabet, the likelihood seems low this quarter. "Expectations for near-term CapEx spending have caught up to reality in our view," they stated, pointing out that the consensus 2024 CapEx estimate has increased by about 33% since the start of the year. Wedbush maintains its Outperform rating on Alphabet with a $205 target price. Ahead of the report, they are focusing on three key areas: operating expense and CapEx growth related to AI investments, second-half advertising growth as comparisons become more challenging, and the ongoing monetization of AI services within the cloud unit. Overall, Wedbush sees a strong performance from Google Search as a significant positive driver for Alphabet's upcoming results.

What You Need To Know Ahead of Google Parent Alphabet's Earnings Report

UPDATE -- July 22, 2024: This article has been updated to reflect more recent share price information. Google parent Alphabet (GOOGL) is set to report second-quarter earnings after the bell Tuesday with investors likely to be watching for sustained cloud growth and updates on artificial intelligence (AI) initiatives. The tech giant is projected to report revenue of $84.3 billion, according to estimates compiled by Visible Alpha, representing a 13% rise over the year-ago period. Net income is expected to come in at $23 billion, or $1.85 per share, an increase from the second quarter of 2023.

Meta Platforms' Q2: What To Expect And What To Watch (NASDAQ:META)

Capital allocation guidance and maintaining buyback pace will be key factors influencing share price movement despite positive earnings momentum. Meta Platforms (NASDAQ:META) (NEOE:META:CA) is set to report earnings for the June quarter on July 24th, and I expect shares to jump on revenue and earnings coming in at the higher end of consensus estimates. My confidence in Meta's upcoming earnings report is anchored on strong consumer engagement thanks to the company's AI efforts, paired with exceptionally strong advertising momentum. Specifically, I see revenues coming in at $39-40 billion, compared to guidance at $36.5-39 billion. On profitability, I project operating income for Q2 at around $15 billion to $16 billion, compared to $14.5 billion estimated by consensus. On that note, Meta strong monetization should offset investor concerns relating CAPEX/AI spending, as long as spending remains in line with Q1 guidance. On the backdrop of strong earnings, I updated my residual earnings model for Meta and now calculate a fair implied share price equal to $549. Providing a note on share price momentum, I point out that Meta stock has strongly outperformed the market YTD. Since the start of the year, META shares are up approximately 35%, compared to a gain of about 15% for the S&P 500 (SP500). Strong User Engagement in Q2 ... Meta's social media empire has seen strong user engagement through the June quarter, building on trends seen in Q1. According to research conducted by TD Cowen, in 2Q24, Facebook users spent an average of 45 minutes per day (flat QoQ), while Instagram users averaged 39 minutes, up from 38 minutes in 2Q23. On that note, engagement among the youngest age cohort (18-24) increased significantly, with Instagram users in this group spending 54 minutes per day, up from 46 minutes the previous year. While TikTok still leads in average daily usage for the 18-24 age group, Meta is catching up and it looks like Instagram is winning some market share, as AI efforts are bearing fruits: AI recommendations now account for 30% of Facebook feed posts and over 50% of Instagram content. (Source: TD Cowen, Research note on Meta, dated July 12th) ... Building A Backdrop For Strong Business Monetization Building on the strong engagement backdrop, paired with healthy consumer spending (read about Amazon's Prime Day record sales - here), I expect Meta to report strong revenue in Q2, expecting $39-40 billion of sales, compared to guidance at $36.5-39 billion. Providing support to my projection, I highlight that Revealbot estimates a 19% YoY surge for Meta's CPM in Q2 (Source: Wells Fargo, Research note on Meta dated July 7th). If we assume the number of ad impression flat vs. Q1 2024, but apply the 2Q CPM at 19% YoY vs. the 6% YoY seen in Q1, then we can calculate Meta's Q2 revenue at about $40.3 billion (vs. $38.3 billion consensus). I am also encouraged by positive feedback through industry channel checks: Having spoken with six market participants who have discretionary spending power over advertising budgets, primarily from SME businesses, I estimate that YoY advertising spend on a macro level in Q2 2024 may increase by 15-20%. Moreover, I highlight that within this favorable environment, Meta is gaining market share. A Jefferies research report projects that in 2024, Meta will capture a 25% share of the digital ad market and an impressive 50% share of incremental industry advertising dollars, a significant increase from 33% in 2023 (Source: Jefferies research note dated April 4, 2024: Rising Above Ad Peers with a Mega Moat). On profitability, I expect a slight 100-150 bps increase in Meta's operating margin vs. Q1, mostly as a consequence of operating leverage on higher topline. In line with this, I project Meta's operating income for Q2 at around $15 billion to $16 billion (compared to $14.5 billion estimated by consensus, according to data collected by Refinitiv). Capital Allocation In Focus Meta Platforms' engagement and monetization engines appear to be firing from all cylinders. But after a negative CAPEX surprise with Q1 supporting, investors are looking for further capital allocation guidance in Q2. In my view, another increase in CAPEX guidance would be a major downside surprise for market participants, and it would likely pressure the share price, despite strong revenue and earnings momentum. At the same time, Investors will likely expect that Meta's Q1 buybacks pace of $15 billion per quarter has been maintained in Q2. If these two conditions are met, flat CAPEX guidance and buyback pace, then shares should have room for upside. Valuation Update: Raise TP To $549 In line with my projections for stronger than expected revenue and earnings momentum for Meta, I update my residual earnings model for the social media empire's stock: For FY 2024, 2025 and 2026, I now expect EPS at around $21.5, $24.5 and $26.7, respectively. Notably, my EPS estimates are about 10%-15% ahead of consensus, mostly as a consequence of lagging expectations relating to Meta's advertising momentum. At the same time, I continue to project a 3.5% terminal growth rate post-2026, while I lower my cost of equity assumption by 50 bps., to 8.5%, in line with equity costs for the broader Magnificent Seven group. Considering the updated EPS, I now calculate a fair implied share price for Meta equal to $549. For context, the value "Speculation" is just the difference to fair implied value. A positive value implies a premium; or in other words, markets are speculating to price a more fundamental upside compared to my estimates. Below you can also find the updated sensitivity table. Investor Takeaway Meta Platforms is set to report earnings for Q2 on July 24th, and I expect shares to rise as revenue and earnings to top the higher end of consensus estimates. This optimism is based on strong consumer engagement driven by the company's AI efforts and robust advertising momentum. In fact, I anticipate revenues of $39-40 billion, exceeding the guidance of $36.5-39 billion, and project Q2 operating income at around $15-16 billion, above the consensus estimate of $14.5 billion. With capital allocation likely being another focus point for Q2, I argue that Meta's strong monetization should alleviate investor concerns about CAPEX and AI spending, provided these expenses align with Q1 guidance. I reiterate my "Buy" rating on Meta and set my target price at $549. Experience as an investment analyst for a major BB-Bank, as well as private equity consultant for MBB. Currently working towards the CFA charter, having completed I&II. Passion for risk-assets (Growth, Contrarian, Emerging Market) ex-colleague and close friend of Investor Express Analyst's Disclosure: I/we have a beneficial long position in the shares of META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Not financial advice. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. 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