Alphabet's Q3 Earnings: AI Investments, Antitrust Challenges, and Market Expectations

Alphabet to report Q3 earnings after the bell

Here is what analysts are expecting, according to average estimates compiled by LSEG: Wall Street is also watching several other numbers in the report: Alphabet's third quarter was filled with shake-ups externally and internally, including at its most senior ranks and its most important business. Earlier this month, the company replaced Prabhakar Raghavan, the company's search and ads boss since 2018, with Nick Fox, a longtime executive known for his role in Google's Assistant unit. Additionally, the team working on the Gemini app, which includes the company's artificial intelligence direct-to-consumer products, will join Google DeepMind under head Demis Hassabis. The moves came as Google continues to restructure its teams to move more quickly in the AI arms race, where it faces increased competition from entrants such as OpenAI's ChatGPT. During the quarter, the company also faced the advancement of several antitrust lawsuits related to its search and ads business. In August, the company faced a guilty verdict from a federal U.S. judge who ruled that Google has illegally held a monopoly in search, marking the first antimonopoly decision against a tech company in decades. In early October, the DOJ made recommendations for Google's search engine business practices, indicating that it was considering a possible breakup of the tech giant as an antitrust remedy, specifically in regard to forcing the company to make "structural" changes to Chrome, Android and Google Play app store businesses. Additionally, the DOJ suggested limiting or prohibiting default agreements and "other revenue-sharing arrangements related to search and search-related products." That would include Google's search position agreements with Apple's iPhone as well as Samsung devices. Those are deals that cost the company billions of dollars a year in payouts but position Google as the default search engine in those products. With the slow-moving legal process, the company is still likely years away from being forced to make any changes to businesses. In a separate antitrust case in early October, a U.S. judge issued a permanent injunction that will force the company to offer alternatives to its Google Play store for downloading apps on Android phones. However, the judge has since granted Google a pause on the injunction. Google was back in court in September facing off for a second time against federal prosecutors, this time for the DOJ's antitrust trial against Google's ad tech business. The trial's closing arguments will take place Nov. 25. Outside of courthouses, Google also made some product announcements during the quarter. In August, the company announced its new Android software update and its latest line of Pixel smartphones that utilize Google's Gemini AI assistant. The company does not make a lot of money from its hardware business, but the latest Android features could help Google drive new revenue through its Gemini AI subscription program.

Here's what analysts are looking for when Google parent Alphabet reports earnings

Eyes are on megacap tech earnings this week, and it is a big one for Google parent Alphabet as the tech behemoth faces several questions around its artificial intelligence spending spree and scrutinized dominance in online search. Alphabet is set to post its third-quarter financial report after the closing bell on Tuesday. Several analysts maintained their buy ratings ahead of the results and expect AI-driven gains to appear in its search and YouTube segments. Still, the consensus revenue estimate implies Alphabet could post its slowest year-over-year growth since the third quarter of 2023 . Analysts polled by LSEG expect Alphabet to earn $1.85 per share on $86.3 billion in revenue, implying year-over-year earnings and revenue growth of 19.1% and 12.5%, respectively. Last quarter, the company's results topped estimates , but shares fell short due to weak YouTube advertising revenue. There is still ample, long-term bullish sentiment behind Alphabet despite fears of increasing regulatory issues and stiffer competition in the digital ad market. Analysts polled by FactSet have a consensus overweight rating and $202.50 target price, suggesting about 21.5% potential upside from Monday's close. Citi Research also added Alphabet to its U.S. Large Cap Recommended List on Oct. 16. In trading Tuesday, the stock was up more than 1%. Shares are up 3% over the past month and have gained roughly 21% year to date. GOOGL YTD mountain Google performance this year. But Jefferies analyst Brent Thill told CNBC on Friday that Google is the most "controversial" name among its megacap tech peers. He said he is looking for clues to see how Alphabet will monetize artificial intelligence, particularly as the company has uniquely refrained from providing any outlook or milestone for the technology. Thill also wants to see how its YouTube and core search businesses are performing and if new AI assistants are affecting users' ability to go to Google. "Overall, we think a lot of the negativity is priced in and we would agree, it definitely has the lowest expectations going in," Thill said on CNBC's "Fast Money." "I think as long as it's not terrible and core search is okay and ad budget looks good, the stock should be okay from here." Goldman Sachs analyst Eric Sheridan is in the camp that thinks Alphabet's current valuation is already pricing in a significant degree of investor negativity, largely tied to the antitrust case and expectations of a rising AI capex cycle. While he remains constructive on the stock, he lowered its price target to $208 per share from $217 in an Oct. 13 note. That still implies the stock can gain more than 30% from Monday's close. Sheridan sees a solid advertising environment and continued strength in short-form video consumption. While still slowing, this should act as a tailwind over the next 12 to 18 months, he said. Sheridan is also fairly bullish on Google's AI efforts and believes the company has had a "balanced approach" in funding its AI investments. "We continue to believe that the ability to deploy AI solutions across an existing array of desktop/mobile computing applications remains a key differentiator at scale in terms of product distribution (across not only Alphabet but a host of our coverage) that remains underappreciated by investors," Sheridan said. The setup heading into earnings remains "undemanding," Deutsche Bank analyst Benjamin Black wrote in an Oct. 17 note to clients. He kept his buy rating and $195 price target on the stock. Like Sheridan, Black expects Alphabet's AI enhancements to support search and YouTube growth, as AI drives efficiency for advertisers. "While advertisers may express some concerns around consumer sentiment, GOOG Search remains a 'utility-like' component of advertiser budgets," he said.