What Wall Street is saying about Alphabet ahead of earnings

Alphabet (GOOGL), the parent company of Google, is scheduled to report fourth quarter results after the market close on Tuesday, February 4, with a conference call scheduled for 4:30 pm Eastern Time. What to watch for:

AI AND QUANTUM INNOVATION: On October 29, along with Alphabet’s better-than-expected Q3 report, Sundar Pichai, CEO of Alphabet and Google, called the momentum across the company “extraordinary.”

“Our commitment to innovation, as well as our long-term focus and investment in AI, are paying off with consumers and partners benefiting from our AI tools. In Search, our new AI features are expanding what people can search for and how they search for it. In Cloud, our AI solutions are helping drive deeper product adoption with existing customers, attract new customers and win larger deals,” Pichai added.

The next day, Seaport Research upgraded Alphabet to Buy from Neutral, citing the company’s continued advertising momentum and expectations for continued near-term strength, driven in part by artificial intelligence. Alphabet is seeing accelerating cloud growth, with cloud strength benefiting from AI adoption, as well as continued operating margin leverage driven by efficiencies, which should continue into 2025, the analyst told investors. While the Justice Department investigations could continue to be an overhang, Seaport does not expect any near-term headwinds as the appeals process could take some time, the analyst added.

In early December, the Google Quantum AI team said in a blog post: “The Willow chip is a major step on a journey that began over 10 years ago… Today in Nature, we published results showing that the more qubits we use in Willow, the more we reduce errors, and the more quantum the system becomes. We tested ever-larger arrays of physical qubits, scaling up from a grid of 3×3 encoded qubits, to a grid of 5×5, to a grid of 7×7 – and each time, using our latest advances in quantum error correction, we were able to cut the error rate in half. In other words, we achieved an exponential reduction in the error rate… The next challenge for the field is to demonstrate a first ‘useful, beyond-classical’ computation on today’s quantum chips that is relevant to a real-world application. We’re optimistic that the Willow generation of chips can help us achieve this goal.”

Afterward, BofA noted that Alphabet announced two major milestones in quantum computing around its Willow quantum chip in a blog post, namely that it is exponentially reducing the rate of errors when adding more units of computation and performing a standard benchmark computation at rates much faster than existing technology. While stating that practical applications do not exist today, the firm adds that “some press reports suggest that Google’s achievements are a significant computing milestone” and argues that advancements with Willow, illustrating that Alphabet remains at the leading edge of technology innovation, are “important for stock sentiment.” Following the news, Alphabet stock was up about 5%, noted the analyst, who maintained a Buy rating on shares of Google’s parent.

Baird said Alphabet’s new Willow quantum chip reinforced Google’s technology leadership. While quantum is still years from broad commercial adoption, the new Willow quantum chip showcases Google’s lead in quantum research, including a new advanced research and manufacturing facility in Santa Barbara, the analyst told investors. The firm says an optimistic view of quantum is that Google will be able to leverage unique strengths across quantum, artificial intelligence and cloud computing to offer a range of “new industry-changing” applications. Baird expects a “quantum arms race to unfold” involving big tech companies, Silicon Valley venture capitalists, and China. It keeps an Outperform rating on Alphabet.

EXPECTATIONS: Current consensus EPS and revenue forecasts for Alphabet’s December-end quarter stand at $2.13 and $96.67B, respectively, according to data provided by LSEG Data and Analytics.

That $2.13 EPS estimate for the fourth quarter is up 2c over the past 90 days ago, according to LSEG Data.

Among analysts tracked by Bloomberg that have updated their views on Alphabet within the last twelve months, 60 have Buy or equivalent ratings, 14 have Hold or equivalent ratings and the average twelve month price target of 43 of those analysts is $220.12.

ANTITRUST FIGHT: In August of last year, a federal judge ruled Google’s payments to make its search engine the default on smartphone web browsers violates U.S. antitrust law in what Bloomberg’s Leah Nylen called “a key victory” for the Justice Department.

In December, Lee-Anne Mulholland Vice President, Regulatory Affairs at Google, wrote in a blog post that the company “strongly disagrees with and will appeal” the decision in the Department of Justice’s search distribution lawsuit. The company filed its own proposal, based on the actual findings in the Court’s decision. “This was a decision about our search distribution contracts, so our proposed remedies are directed to that,” Mulholland said. “Browser companies like Apple (AAPL) and Mozilla should continue to have the freedom to do deals with whatever search engine they think is best for their users. The Court accepted that browser companies ‘occasionally assess Google’s search quality relative to its rivals and find Google’s to be superior.’ And for companies like Mozilla, these contracts generate vital revenue. Our proposal allows browsers to continue to offer Google Search to their users and earn revenue from that partnership. But it also provides them with additional flexibility: It would allow for multiple default agreements across different platforms (e.g., a different default search engine for iPhones and iPads) and browsing modes, plus the ability to change their default search provider at least every 12 months… Our proposal includes a robust mechanism to ensure we comply with the Court’s order without giving the Government extensive power over the design of your online experience. We don’t propose these changes lightly. They would come at a cost to our partners by regulating how they must go about picking the best search engine for their customers. But we believe that they fully address the Court’s findings, and do so without putting Americans’ privacy and security at risk or harming America’s global technology leadership.”

After Google submitted its proposal in the search distribution case, analysts at JPMorgan called the company’s remedies proposal “more modest than the DOJ’s proposal, as expected.” While the firm continues to expect a negative impact on Google’s financials on enforcement of any remedy, it says determining the financial implications remains challenging due to uncertainties around the actual remedy and adds that it continues to ultimately believe the judge’s final decision next summer will be “more balanced” between the DOJ and Google’s remedies, with greater consideration around the potential impact to users. JPMorgan maintains an Overweight rating on Alphabet shares.

Meanwhile, Barclays said Google’s proposed final judgment remedy package addresses about half of the issues raised around the exclusive default contracts highlighted by the court in the August 5 decision. The remedy package at first glance would be operating income accretive by 10%-plus, the analyst tells investors in a research note. Barclays believes the remedies are likely to reduce Google’s traffic acquisition cost rate on all distribution deals and retain 100% of commercial queries, a “significantly positive outcome.” The question now is whether the court goes with the suggested remedies or the Department of Justice’s, Barclays points out. The firm keeps an Overweight rating on Google parent Alphabet with a $220 price target.

In early January, JMP Securities downgraded Alphabet to Market Perform from Outperform without a price target. The firm views 2025 as a year of technology “inflection” for multiple major new technologies as generative artificial intelligence is operationalized and autonomous vehicles become more widespread. JMP downgraded Alphabet on the risk of antitrust penalties that could “significantly impact” Google’s U.S. distribution of search and search revenue. With a final ruling expected by August, JMP expects the case to be a primary focus for investors in the year ahead, limiting multiple expansion, the analyst tells investors in a research note. The firm thinks the court decision will “be severe” after European regulators were unable to impact the search market. It sees the shares as fairly valued.

At the end of last month, a U.S. federal judge denied a motion by Apple to intervene as a defendant in the remedy trial of the DOJ vs. Google case, saying Apple’s motion was untimely. Apple made the request in December 2024, seeking to defend its “property interest” in a billion-dollar exclusivity contract with Google that makes the search engine the default option on its Safari browsers across its devices, but U.S. District Judge Amit Mehta explained in his ruling that Apple’s motion was untimely and thus he must deny the motion to intervene. “Apple knew (or should have known) that waiting two-and-a-half months to intervene in a proceeding scheduled to last just eight months altogether would constitute a significant delay,” Mehta said. The court will, however, “permit Apple to participate as amicus curiae and file post-hearing submissions to ensure consideration of Apple’s views when crafting the remedial decree.”

DEEPSEEK SELLOFF: The buzz around DeepSeek, a Chinese-built large-language open-source model that claims to rival offerings from OpenAI’s ChatGPT and Meta Platforms (META) but using a much smaller budget, sent several U.S. technology stocks tumbling on January 27. DeepSeek’s new AI model was being praised for being cost-effective and capable of running on less-advanced chips, which raised questions about the high valuations of companies like Nvidia (NVDA).

Jefferies views DeepSeek’s launch “as part of an ongoing evolution, not revolution” and calls the market selloff in software stocks “largely overdone.” Innovations which continue to drive increasing efficiency at inference, but also training, will further improve the return on investment of artificial intelligence, leading to faster software adoption, the analyst argues. Jefferies maintains its existing rationale for owning Microsoft and Amazon (AMZN) for enterprise, Meta and Alphabet for consumer, and Snowflake (SNOW) for a potential data and AI “breakout play.” Inference efficiency is part of an ongoing trend with DeepSeek and not as incremental as some lead to believe, according to Jefferies.

On January 30, Oppenheimer raised the firm’s price target on Alphabet to $225 from $215 and kept an Outperform rating on the shares. The firm notes Meta indicated strong advertising trends and recent investor conversations suggest a favorable setup heading into results. Additionally, Meta confirmed Gen AI is driving ad price growth, which should also benefit Alphabet, cementing it as an AI winner, Oppenheimer added. If investors begin to struggle with Meta’s revenue outlook or mid-single digit 2025 EPS growth, Alphabet could become more attractive alternative, the firm argues.

The same day, Bernstein raised the firm’s price target on Alphabet to $210 from $185 and keeps a Market Perform rating on the shares. Despite the firm cautious outlook on Google Search, with the narrative once again picking up that DeepSeek may accelerate disruption timelines, Bernstein is mostly constructive on the Q4 setup.

SENTIMENT: Check out recent Media Buzz Sentiment on Alphabet as measured by TipRanks.