To The Moon

With major tech companies gearing up to report their quarterly earnings, the market is keenly watching for unexpected developments, especially related to artificial intelligence (AI) and ad revenue. Among them, Alphabet’s upcoming Q3 earnings release is highly anticipated, given that its Q2 report led to an unexpected drop in stock price. The question on many investors’ minds is: will Q3 prove different?

1. Recap: Alphabet’s Q2 Earnings and the Stock Price Drop

After releasing its Q2 earnings, Alphabet saw its stock price fall unexpectedly. Although Alphabet’s results showcased growth in revenue, earnings, and cloud computing, they fell short of the lofty expectations set by analysts, primarily due to deceleration in its Google Cloud revenue. Alphabet’s cloud segment has been seen as a crucial growth driver, especially in the race to secure a significant foothold in the AI space, where cloud infrastructure plays a fundamental role. This deceleration was perceived as a warning sign of potential slowing demand or increased competition. Additionally, rising costs from heavy AI investment caused some concern among investors. These factors collectively contributed to the post-earnings decline in Alphabet’s stock, signalling the market’s high sensitivity to cloud and AI-related growth expectations.

2. Analysts’ Expectations for Q3 Earnings

Analysts expect Alphabet’s Q3 earnings to shed more light on the company’s AI advancements, along with Google Cloud’s growth rate. Key metrics to watch include revenue growth from Google Search, the impact of election-related advertising on YouTube, and, crucially, Google Cloud. Analysts also anticipate that Alphabet’s operating expenses might remain elevated due to its ongoing AI investments, though these costs are expected to moderate over the long term as AI products begin contributing meaningfully to revenue. Another focal point is the possibility of Alphabet expanding its AI integration across core services, which could position it as a stronger player alongside competitors like Microsoft.

3. Will the Q2 Story Repeat Itself?

There is a chance that the Q2 scenario could recur if Alphabet’s Q3 earnings disappoint on key metrics, especially if Google Cloud fails to meet growth expectations or if costs continue to outpace revenue growth. Investors are also aware that the AI race is intensifying, and Alphabet’s perceived lagging behind Microsoft in AI integration could impact sentiment. That said, a well-received AI update or any sign of accelerated ad revenue from election spending could mitigate these risks. Thus, while the possibility of a Q2-style drop remains, strategic positive developments in AI or ad performance could offer a buffer.

4. Has Alphabet’s Stock Bottomed Out? Possible Extremes Post-Earnings

Determining whether Alphabet’s stock has bottomed out depends on the company’s ability to exceed current growth expectations and provide clarity on its AI roadmap. If Alphabet demonstrates tangible progress in AI and cloud and shows resilience in ad revenue amid economic uncertainties, its stock could see a significant uplift. On the other hand, if Q3 results reveal stagnation in cloud growth, intensifying competition, or unchecked costs, the stock may revisit lower levels, signalling a potential bottom only if investor sentiment further cools. The two extremes after the earnings report are: (1) a rally driven by positive AI announcements and strong ad revenue, or (2) another downward adjustment should Alphabet struggle to keep pace in the AI and cloud space.

5. Is It Possible to Draw Conclusions?

At this stage, drawing a firm conclusion about Alphabet’s future performance remains challenging. Alphabet’s trajectory is tethered to several unpredictable factors, including AI development timelines, competitive pressure, and economic conditions that influence ad spending. However, what is clear is that Alphabet’s Q3 earnings will likely serve as a decisive moment. Investors should weigh Alphabet’s progress in AI and cloud as critical signals for its long-term potential in an increasingly AI-centric tech landscape. Ultimately, Q3 will provide a clearer view of whether Alphabet can keep pace with or surpass expectations, setting the tone for future quarters.

@TigerWire