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The search giant’s upcoming results are expected to reflect strength in Android, and solid momentum in search and cloud businesses. Expanding generative AI capabilities are likely to have been major positives.
However, increasing litigation issues and expenses are likely to have been concerning.
For the second quarter, the Zacks Consensus Estimate for revenues is pegged at $70.55 billion, indicating growth of 13.7% from the year-ago quarter’s actual.
The Zacks Consensus Estimate for second-quarter earnings is pegged at $1.85 per share, which implies a rise of 28.5% from the year-ago quarter’s reported number. The estimate has been revised upward by 0.5% in the past seven days.
Image Source: Zacks Investment Research
Alphabet has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in the trailing four quarters, the average beat being 11.34%.
Image Source: Zacks Investment Research
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Alphabet this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
Alphabet has been cashing in on the increasing demand for Large Language Models (LLMs) with its most powerful AI model called Gemini. This is likely to have benefited the quarterly performance significantly.
Growing momentum in Google’s Vertex AI, which enables developers to train, tune, augment and deploy applications using generative AI models, is anticipated to have been a positive.
Google’s introduction of various open-source tools to support generative AI projects and infrastructure is another plus. The company’s launch of an enterprise-focused AI code completion and assistance tool called Gemini Code Assist is noteworthy. These tools are likely to have contributed well to top-line growth by delivering enhanced user experience.
Strength in Search, YouTube & Ad
Alphabet division Google’s continued efforts toward innovation in AI techniques for the advancement of its search segment, which accounts for a major portion of its total revenues, are expected to have driven traffic on its platform in the to-be-reported quarter.
The integration of generative AI technology into the search engine is expected to have continued to benefit Google Search. With the large language models (LLM), GOOGL is likely to have driven its search momentum in the second quarter. LLMs, coupled with multi-search and visual exploration features, are expected to have continued improving the search results.
The Search Generative Experience (“SGE”), which leverages generative AI technology to make search results more natural and intuitive, is likely to have contributed well.
The company’s strength in the mobile search category on the back of mobile-friendly algorithms, robust product listings and flight search capabilities is a plus. It is likely to have boosted the search traffic on the Chrome browser in the second quarter.
The Zacks Consensus Estimate for Google Search & Other revenues is pegged at $47.46 billion, indicating an increase of 11.3% from the year-ago quarter’s reported figure.
Coming to the advertisement business, Alphabet’s growing efforts to deliver better performance and profitability to advertisers on the back of foundational research models and LLMs are expected to have contributed well.
SGE is expected to have aided the advertisement business as it can create relevant, customized and high-quality ads. The strength in the conversational experience of Google Ads and Performance Max is likely to have driven the company’s momentum among advertisers in the second quarter. The improving performance of YouTube ads is anticipated to have been another positive.
The consensus mark for Google advertising is pegged at $64.28 billion, implying growth of 10.5% from the prior-year quarter’s reported figure.
Coming to non-advertisement revenues of YouTube, strengthening user momentum in YouTube Shorts is likely to have been a tailwind. Google’s growing efforts to bolster relationships with content creators are likely to have acted as a positive.
The growing momentum across Android and Pixel devices is expected to have benefited Alphabet’s performance in the to-be-reported quarter.
The above-mentioned factors are anticipated to have benefited Google’s Services segment’s performance in the second quarter.
The Zacks Consensus Estimate for Google Services revenues is pegged at $73.43 billion, indicating growth of 10.8% from the year-ago reported figure.
Growing Cloud & Other Bets Businesses
Alphabet has been rapidly growing in the booming cloud-computing market. Google Cloud has solidified its position as the third-largest provider in the highly competitive cloud infrastructure market against Amazon’s (AMZN - Free Report) AWS and Microsoft’s (MSFT - Free Report) Azure, which hold the first and second positions, respectively.
Google Cloud has turned out to be the key growth driver for Alphabet, owing to strengthening cloud service offerings. The solid adoption of the Google Cloud Platform and Google Workspace is expected to have driven growth in the Google Cloud segment.
Google’s growing investments in infrastructure, security, data management, analytics and AI are expected to have been major positives.
Its strengthening generative AI-backed cloud offerings are expected to have driven Google’s momentum among cloud customers in the quarter-to-be-reported.
The Zacks Consensus Estimate for Google Cloud revenues is pegged at $10.08 billion, suggesting growth of 25.5% from the year-ago quarter’s reported figure.
Alphabet’s strengthening efforts to bolster its healthcare technology portfolio are expected to have driven growth in its Other Bets segment in the second quarter.
The Zacks Consensus Estimate for Other Bets revenues is pegged at $414.82 million, suggesting growth of 45.6% from the year-ago quarter’s reported figure.
Price Performance & Valuation
Alphabet’s shares have appreciated 31.5% on a year-to-date basis, outperforming the industry, S&P 500 index and the Zacks Computer and Technology sector’s rally of 28.8%, 17% and 25.6%, respectively.
Alphabet has also outperformed its cloud peers Amazon and Microsoft’s growth of 27.1% and 19.6% year to date, respectively.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Now, let us look at the value GOOGL offers investors at current levels.
Currently, GOOGL is trading at a discount, with a forward 12-month P/E of 22.56X compared with the industry’s 23.68X, indicating a good entry point for investors.
GOOGL's P/E F12M Graph
Image Source: Zacks Investment Research
Investment Thesis
Alphabet faces significant litigation across various regions, especially the United States and the European Union. Regulatory scrutiny continues to worsen, with the competition commission issuing several statements of objections. Stiff competition in various fields, such as cloud computing and generative AI space, does not bode well for its market position.
Nevertheless, it is hard to ignore Alphabet’s growing efforts to bolster its generative AI capabilities. Its leading position in the search engine space, strengthening cloud footprint, solid momentum in YouTube and Android, and growing traction in the autonomous driving space should aid Alphabet’s prospects.
Final Take
Although Alphabet presents a compelling investment opportunity, owing to its fundamental strength, investors should take a nuanced approach as both opportunities and challenges warrant careful consideration. Investors should not rush in to buy the stock. Those who already have the GOOGL stock in their portfolio can hold on to it because the search giant is less likely to disappoint.
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Alphabet (GOOGL) Stock: Buy, Sell or Hold Before Q2 Earnings?
Alphabet (GOOGL - Free Report) is scheduled to report second-quarter 2024 results on Jul 23.
The search giant’s upcoming results are expected to reflect strength in Android, and solid momentum in search and cloud businesses. Expanding generative AI capabilities are likely to have been major positives.
However, increasing litigation issues and expenses are likely to have been concerning.
For the second quarter, the Zacks Consensus Estimate for revenues is pegged at $70.55 billion, indicating growth of 13.7% from the year-ago quarter’s actual.
The Zacks Consensus Estimate for second-quarter earnings is pegged at $1.85 per share, which implies a rise of 28.5% from the year-ago quarter’s reported number. The estimate has been revised upward by 0.5% in the past seven days.
Image Source: Zacks Investment Research
Alphabet has an impressive earnings surprise history. The company’s earnings outpaced the Zacks Consensus Estimate in the trailing four quarters, the average beat being 11.34%.
Image Source: Zacks Investment Research
Earnings Whispers
Our proven model does not conclusively predict an earnings beat for Alphabet this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
GOOGL has an Earnings ESP of 0.00% and carries a Zacks Rank #3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Key Factors to Influence Alphabet’s Q2 Results
Strong Generative AI Capabilities
Alphabet has been cashing in on the increasing demand for Large Language Models (LLMs) with its most powerful AI model called Gemini. This is likely to have benefited the quarterly performance significantly.
Growing momentum in Google’s Vertex AI, which enables developers to train, tune, augment and deploy applications using generative AI models, is anticipated to have been a positive.
Google’s introduction of various open-source tools to support generative AI projects and infrastructure is another plus. The company’s launch of an enterprise-focused AI code completion and assistance tool called Gemini Code Assist is noteworthy. These tools are likely to have contributed well to top-line growth by delivering enhanced user experience.
Strength in Search, YouTube & Ad
Alphabet division Google’s continued efforts toward innovation in AI techniques for the advancement of its search segment, which accounts for a major portion of its total revenues, are expected to have driven traffic on its platform in the to-be-reported quarter.
The integration of generative AI technology into the search engine is expected to have continued to benefit Google Search. With the large language models (LLM), GOOGL is likely to have driven its search momentum in the second quarter. LLMs, coupled with multi-search and visual exploration features, are expected to have continued improving the search results.
The Search Generative Experience (“SGE”), which leverages generative AI technology to make search results more natural and intuitive, is likely to have contributed well.
The company’s strength in the mobile search category on the back of mobile-friendly algorithms, robust product listings and flight search capabilities is a plus. It is likely to have boosted the search traffic on the Chrome browser in the second quarter.
The Zacks Consensus Estimate for Google Search & Other revenues is pegged at $47.46 billion, indicating an increase of 11.3% from the year-ago quarter’s reported figure.
Coming to the advertisement business, Alphabet’s growing efforts to deliver better performance and profitability to advertisers on the back of foundational research models and LLMs are expected to have contributed well.
SGE is expected to have aided the advertisement business as it can create relevant, customized and high-quality ads. The strength in the conversational experience of Google Ads and Performance Max is likely to have driven the company’s momentum among advertisers in the second quarter. The improving performance of YouTube ads is anticipated to have been another positive.
The consensus mark for Google advertising is pegged at $64.28 billion, implying growth of 10.5% from the prior-year quarter’s reported figure.
Coming to non-advertisement revenues of YouTube, strengthening user momentum in YouTube Shorts is likely to have been a tailwind. Google’s growing efforts to bolster relationships with content creators are likely to have acted as a positive.
The growing momentum across Android and Pixel devices is expected to have benefited Alphabet’s performance in the to-be-reported quarter.
The above-mentioned factors are anticipated to have benefited Google’s Services segment’s performance in the second quarter.
The Zacks Consensus Estimate for Google Services revenues is pegged at $73.43 billion, indicating growth of 10.8% from the year-ago reported figure.
Growing Cloud & Other Bets Businesses
Alphabet has been rapidly growing in the booming cloud-computing market. Google Cloud has solidified its position as the third-largest provider in the highly competitive cloud infrastructure market against Amazon’s (AMZN - Free Report) AWS and Microsoft’s (MSFT - Free Report) Azure, which hold the first and second positions, respectively.
Google Cloud has turned out to be the key growth driver for Alphabet, owing to strengthening cloud service offerings. The solid adoption of the Google Cloud Platform and Google Workspace is expected to have driven growth in the Google Cloud segment.
Google’s growing investments in infrastructure, security, data management, analytics and AI are expected to have been major positives.
Its strengthening generative AI-backed cloud offerings are expected to have driven Google’s momentum among cloud customers in the quarter-to-be-reported.
The Zacks Consensus Estimate for Google Cloud revenues is pegged at $10.08 billion, suggesting growth of 25.5% from the year-ago quarter’s reported figure.
Alphabet’s strengthening efforts to bolster its healthcare technology portfolio are expected to have driven growth in its Other Bets segment in the second quarter.
The Zacks Consensus Estimate for Other Bets revenues is pegged at $414.82 million, suggesting growth of 45.6% from the year-ago quarter’s reported figure.
Price Performance & Valuation
Alphabet’s shares have appreciated 31.5% on a year-to-date basis, outperforming the industry, S&P 500 index and the Zacks Computer and Technology sector’s rally of 28.8%, 17% and 25.6%, respectively.
Alphabet has also outperformed its cloud peers Amazon and Microsoft’s growth of 27.1% and 19.6% year to date, respectively.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Now, let us look at the value GOOGL offers investors at current levels.
Currently, GOOGL is trading at a discount, with a forward 12-month P/E of 22.56X compared with the industry’s 23.68X, indicating a good entry point for investors.
GOOGL's P/E F12M Graph
Image Source: Zacks Investment Research
Investment Thesis
Alphabet faces significant litigation across various regions, especially the United States and the European Union. Regulatory scrutiny continues to worsen, with the competition commission issuing several statements of objections. Stiff competition in various fields, such as cloud computing and generative AI space, does not bode well for its market position.
Nevertheless, it is hard to ignore Alphabet’s growing efforts to bolster its generative AI capabilities. Its leading position in the search engine space, strengthening cloud footprint, solid momentum in YouTube and Android, and growing traction in the autonomous driving space should aid Alphabet’s prospects.
Final Take
Although Alphabet presents a compelling investment opportunity, owing to its fundamental strength, investors should take a nuanced approach as both opportunities and challenges warrant careful consideration. Investors should not rush in to buy the stock. Those who already have the GOOGL stock in their portfolio can hold on to it because the search giant is less likely to disappoint.