By Angela Palumbo
Alphabet earnings are here, and Wall Street is keeping a close eye on what it has to say about search and spending.
The Google parent is scheduled to report third-quarter earnings after the stock market closes on Tuesday. Analysts surveyed by FactSet expect it will post adjusted earnings of $1.84 a share on revenue of $86.37 billion. That would be a jump from the $1.55 a share on revenue of $76.7 billion reported in the same period last year.
One of the biggest metrics investors will be watching is search, and Wall Street expects the company to report search revenue of $49.02 billion. That would be an increase from the $44.02 billion in the same period last year and the $48.51 billion posted last quarter.
"The franchise threatening piece of this is search and AI and what it's going to do to the business," Wedbush analyst Scott Devitt told Barron's. He rates Alphabet as Outperform with a $205 price target.
Google has been the dominant search engine for more than two decades. But the emergence of generative artificial intelligence has brought in a new, more intense competition than it used to get from websites such as Bing or Yahoo. OpenAI's ChatGPT and Meta Platform's Meta AI put Google at risk of losing market share -- a risk that hasn't been there for quite some time.
To mitigate these concerns, Alphabet has been spending big on its own gen-AI technology. In July, the company reported that capital spending rose to $13.2 billion in the second quarter, which increased from $12 billion in the March quarter.
"The risk of under-investing is dramatically greater than the risk of over-investing for us here," Chief Executive Sundar Pichai said in the company's second-quarter earnings call on July 23. "Even in scenarios where if it turns out we are over-investing, these are infrastructure which are widely useful for us, they have long useful lives."
But investors were concerned the company was spending too much on AI without a clear timeline for a return on its investment, and shares fell 5% on July 24. The stock has dropped about 8% since July 23.
"I do think Capex is going to continue to creep up for Alphabet, Amazon, and Meta just because they're building out their capabilities for something that's the next 10 to 20 years cycle," Devitt said.
He added that investors will be keeping an eye on how much that spending goes up, and if that number increases but search underperforms, the "next day would be a long day for the stock."
Spending and competition aren't the only drags on the stock. For one, investors have been rotating money out of highly valued tech into small-cap stocks that could benefit more from the Federal Reserve's rate cuts. Alphabet also faces regulatory issues, including a judge's ruling that the company has a monopoly in general search services and general text advertising.
D.A. Davidson analyst Gil Luria rates Alphabet as Neutral. He wrote in a note on Monday that any sign of disappointment in the search business could draw a strong reaction, while positive surprise could come from "any level of openness to breaking up the business in order to release value and address the DOJ legal case."
Alphabet stock has risen 19% this year, but has dropped 13% from its all-time closing high of $191.18 on July 10. The stock is also trading at 19.4 times forward earnings, which is below its five-year average of 23 times. That could mean expectations for this earnings report aren't as high as last quarter, when the stock was hovering around its peak.
Fellow tech stocks Microsoft, Meta, Amazon and Apple are also scheduled to report earnings later in the week.
Write to Angela Palumbo at angela.palumbo@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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October 29, 2024 01:00 ET (05:00 GMT)
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