Analysts think the profitability of Alphabet’s cloud segment could drive an upside to consensus EPS growth, but the transition to AI-powered conversational search will disrupt its financials.
Alphabet is scheduled to announce Q2 earnings results after the market closes on Tuesday, July 25th.
Latest Results
Alphabet’s revenue rose 3% to $69.79 billion from $68 billion a year earlier, net income fell to $15.05 billion, or $1.17 per share, from $16.44 billion, or $1.23 per share.
It is finally generating a profit in its cloud-computing business. The unit recorded operating income of $191 million in the quarter, following a $706 million loss a year ago.
Q2 Guidance
The company says for 2023, they expect total capex to be modestly higher than in 2022 and they are meaningfully slowing pace of hiring in 2023.
Progress In Cloud Computing Should Propel AI Opportunities
According to an estimate provided by Alphabet, the global cloud market was worth about $505 billion in 2022. By 2026, it's expected to grow to about $1.06 trillion. That's a 20.4% annualized growth rate over that window of time.
In addition to the broad development prospects of cloud computing, the fastest grower of the three major players has actually been Alphabet. Revenue for Google Cloud jumped 105.4% from 2020 to 2022. This compares to the 76.4% reported for Microsoft Cloud and the 76.4% reported for AWS. Nowadays, the high development allowed its share of the big three to grow from 12.2% in the first quarter of last year to 13% the same time this year.
Mixed Impact of Generative AI on YouTube Advertisers
According to data from Nielsen, YouTube continues to be the streaming platform with the most viewership time in the US, with 8.5% share in May 2023. This is not surprising given that it is free and ad-supported.
With YouTube creators becoming increasingly empowered by versatile generative AI tools, it will only amplify the rising trend of audiences consuming more user-generated content on TVs, conducive to more YouTube advertising revenue, benefitting Google investors.
However, we shouldn’t ignore the risks related to generative AI, YouTube will need to overcome various legal obstacles to be able to offer powerful generative AI tools to their creators, and as generative AI tools become widely accessible across platforms, it may subdue the boost to YouTube’s advertising revenue relative to competitors.
Analyst Opinions
Bloomberg analyst Mandeep Singh said Sales-growth expectations are low for Alphabet's core search and YouTube segments. Its ad-impression growth may be below social-media rivals, with Bing and ChatGPT gaining some search traffic, while ad-pricing declines have likely stabilized. He believed the resilience in consumer spending might have aided travel and retail spending on search ads. That, coupled with profitability of the company's cloud segment, could drive upside to consensus EPS growth.
UBS analyst Lloyd Walmsley downgraded it to neutral from buy, albeit with a higher $132 per share price target compared with the previous $123 forecast. He found difficulty forecasting more upside for Alphabet, noting revenue headwinds remain in the near term from new search competition, and it remains to be seen whether generative artificial intelligence will be a tailwind for the company.
Wells Fargo analyst Ken Gawrels initiated an Equal-weight rating and offered a $117 per share price target. He said the forthcoming format transition to AI-powered conversational search will disrupt Google financials. Even if Google retains leadership, it likely requires self-cannibalization, lower growth and margin pressure medium term.
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