What to expect from Alphabets' second-quarter earnings

What to expect from Alphabets’ second-quarter earnings

CEO of Alphabet and Google Sundar Pichai Mateusz WlodarczykNurPhoto/Getty Images

After two decades of dominance, is Google’s vaunted Internet search business about to be dethroned by artificial intelligence?

Alphabet, the parent company of Google, will release its quarterly earnings report after market close on Tuesday, providing investors with some early data to help answer the question. The rise of generative AI tools in recent months and Microsoft rival Google’s adoption of AI, particularly in its Bing search engine, make this one of Alphabet’s most anticipated earnings reports in years.

Expectations are much more moderate, in terms of what investors expect from Alphabet, so the quarter could actually set up quite well for them, Bernstein analyst Mark Shmulik said. However, with Alphabet shares up about 40% so far this year, the stock has room to fall.

Among the key questions for investors are the extent to which conversational AI chatbots like Bing Chat and ChatGPT have been stealing users and advertising from Google Search and how the new competition has impacted Google’s internal spending and profit margins, especially in light of Google’s recent cost-cutting efforts, laying off more than 12,000 jobs as of early 2023.

When they initially shared the margin expansion comments earlier in the year, that was before all this AI stuff happened, and so effectively, investment priorities shifted, Shmulik said.

Wall Street analysts expect Alphabet to post revenue of $72.8 billion for the quarter ended June 30, which would represent a 4.5% year-over-year increase and a notable slowdown from the same period last year, when Alphabet grew 13%. Analysts had expected earnings per share of $1.34 for the quarter.

Alphabet generates about 80% of its revenue from online advertising, with ads served by Google’s search engine ranking among the company’s most profitable services. Analysts and investors fear that new AI bots, like Bing Chat, will dent Google’s long-standing cash by directly answering users’ questions and making the Google search page a less central destination on the Internet.

Google has responded by releasing its own AI search tool, called the Google Bard. And Google cofounder Sergey Brin has reportedly returned to the company to help with the AI ​​efforts, a sign of how seriously the company takes the opportunity and threat of AI

Investors will look for more details on these efforts when Alphabet CEO Sundar Pichai hosts the conference call on Tuesday. In June, Pichai said Google was in a better position for AI than it was during the move to mobile computing a decade ago.

There have been mixed signals about the state of the search market, with some reports suggesting that the initial excitement around ChatGPT has cooled off and the impact on Google’s search market share has been modest so far. Anything that requires change in consumer behavior are always very skeptical, said Bernsteins Shmulik.

Shmulik was behind one of two reports that hit Alphabet shares with downgrades last month, but now that the bar has been lowered, he sees the potential to outperform expectations.

Search revenue will be the key people who want to see sequential growth from Q1. But research market share is also on the minds of investors.

Alphabets’ spending plans following the AI ​​surge will also be in the spotlight. The servers and specialized chips needed to power the AI ​​could potentially drive up Alphabets’ capital expenditures, particularly as competition remains fierce with cloud providers such as Microsoft Azure and Amazon AWS.

And the rush to hire AI talent could drive up operating expenses. Second [hotlink]barclays,[/hotlink] however, Google’s deep ranks may give it an edge. Barclays describes Google’s army of employees as more efficient than that of Meta, TikTok and Snapchat in terms of employee-to-user ratio and scale.

The engineer hoarding that Google has conducted in recent years will pay dividends, in terms of new product shipments compared to other Internet and consumer software companies, but time will tell, Barclays analyst Ross Sandler wrote in a May report.

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