What Wall Street is saying about Alphabet ahead of earnings

Alphabet (GOOGL), the parent company of Google, is scheduled to report second quarter results after the market close on Tuesday, July 25, with a conference call scheduled for 5:00 pm ET. What to watch for:

“FULL FRONTAL AI ATTACK”: On May 10, Alphabet hosted the keynote for its annual developer conference, Google I/O.

Following that event, Jefferies described the start of the Google I/O developer conference as “one of the most substantial in years,” and one at which the company “redeemed itself” after a disappointing Paris event in February. With updates across both consumer and business use cases, and advances in the core Search, Workspace, Google Cloud, and Android, Google “presented a much more coherent message about its generative AI strategy” and launched a “full frontal AI attack” at I/O, said the analyst, who sees momentum accelerating and expects monetization before year-end. Jefferies has a Buy rating on shares of Google parent Alphabet.

Morgan Stanley added that Google’s leadership team provided the “most detailed and tangible vision for its AI strategy to-date” with the company’s I/O keynote, which built confidence in the company’s “strong long term AI competitive position.” AI is reshaping all of Alphabet’s product faster than expected, argues the firm, which believes that yesterday’s event “should build investor confidence in business durability and AI upside to come.” Morgan Stanley has an Overweight rating on Alphabet shares.

BofA analysts, meanwhile, stated that the Google I/O keynote was “packed with announcements” featuring AI integration into products including Search, Maps, Android, Cloud, and Google Workspace, arguing that Google’s presentation was “a big improvement from the disappointing press event in February.” Google showed off a strong framework for AI chatbot integration into search and the I/O presentation helped address three primary AI-related search concerns, namely product, cost and monetization, says the analyst. BofA maintains a Buy rating on Google parent Alphabet.

On May 15, Loop Capital downgraded Alphabet to Hold from Buy. Google’s event in the prior week “opened some eyes to the company’s strong position” in artificial intelligence, but the firm thinks concern over whether Alphabet can maintain its dominant position through “this massive technology transformation” will hold back the stock’s valuation. It considers search competition from Microsoft (MSFT) a lessor threat than risk of displacement from behavioral change as users interact more with AI assistants to find information. Loop believes the long-term structural uncertainties surrounding the AI transition “will keep investors nervous as the landscape evolves and put a ceiling” on Alphabet’s valuation.

On June 26, Bernstein downgraded Alphabet to Market Perform from Outperform. At that time, the stock was up 40% from its November lows and looked fairly valued, with risk-reward now seen as balanced, the analyst told investors. The firm added that while it remained optimistic on digital ad spend recovery, there is increasing competition from retail media and some Generative AI pressure is capping Search growth over the near term.

On the same day, UBS downgraded Alphabet to Neutral from Buy as the analyst sees limited upside to consensus estimates and near-term monetization risk. It is difficult to see upside to UBS’s current high-single-digit Sites growth estimates and Alphabet faces medium-term revenue risk from new search displacing advertising inventory with generative artificial intelligence responses, which may take time to optimize, the analyst told investors. The firm says the company’s operating margin expansion from efficiency efforts could be offset by a generative AI-driven investment cycle. As such, UBS sees a better risk/reward skew in Buy-rated Amazon (AMZN) and Meta Platforms (META) relative to Alphabet.

ANTITRUST FIGHTS: On June 14, the European Commission announced that it has informed Alphabet’s Google of its preliminary view that the company breached European Union antitrust rules “by distorting competition in the advertising technology industry.” The Commission “takes issue with Google favoring its own online display advertising technology services to the detriment of competing providers of advertising technology services, advertisers and online publishers.” The Commission preliminarily finds that, since at least 2014, Google “abused its dominant positions.” It added, “The Commission preliminarily finds that, in this particular case, a behavioural remedy is likely to be ineffective to prevent the risk that Google continues such self-preferencing conducts or engages in new ones. Google is active on both sides of the market with its publisher ad server and with its ad buying tools and holds a dominant position on both ends. Furthermore, it operates the largest ad exchange. This leads to a situation of inherent conflicts of interest for Google. The Commission’s preliminary view is therefore that only the mandatory divestment by Google of part of its services would address its competition concerns.”

In reply, Dan Taylor, Vice President, Global Ads, stated in a post to the Google blog: “Today’s Statement of Objections from the European Commission sets out claims that are not new and relate to a narrow part of our advertising business. It fails to recognize how advanced advertising technology helps merchants reach customers and grow their businesses – while lowering costs and expanding choices for consumers. We look forward to showing how we have enabled higher-quality, more effective digital ads that have helped fund broader access to content and information online for everyone.”

After the European Commission’s statement of objections alleging an abuse of Google’s dominant market position within the advertising tech industry, Citi analysts said the announcement is similar to the Department of Justice’s January antitrust suit against Google, increasing the risk that Google Ad Manager is divested. However, the firm believes Google’s core DV360 is likely to be unaffected, and it is most focused on Google’s generative artificial intelligence initiatives and its core Search and YouTube units.

Meanwhile, on June 29, the FTC said in a blog post that its Bureau of Competition, working closely with the Office of Technology, is focused on ensuring open and fair competition, including at key inflection points as technologies develop. Generative AI represents one of these paradigm shifts. The FTC said “Accordingly, it is especially important that firms not engage in unfair methods of competition or other antitrust violations to squash competition and undermine the potential far-reaching benefits of this transformative technology. Unfair methods of competition can distort the rate and direction of innovation. By contrast, open and competitive markets can pave the way for emerging technologies, such as generative AI, to yield their maximum potential benefit.” The agency added “Some markets for specialized chips are-or could be, without appropriate competition policies and antitrust enforcement-highly concentrated. Last year a challenge by the FTC led to Nvidia (NVDA) abandoning its proposed $40B acquisition of Arm. The FTC’s complaint alleged that the merger would have stifled competition in multiple processor markets, including chips for cloud service providers. Today, increasing demand for server chips may outpace supply in some instances. There are reports, for example, that the spike in demand for server chips that can train AI has caused a shortage, prompting major cloud-server providers such as AWS (AMZN), Microsoft (MSFT), Google, and Oracle (ORCL) to ‘limit their availability for customers.’ And firms in highly concentrated markets are more prone to engage in unfair methods of competitions or other antitrust law violations.” It concluded that “As competition issues surrounding generative AI continue to develop, the Bureau of Competition, working closely with the Office of Technology, will use our full range of tools to identify and address unfair methods of competition.”

EXPECTATIONS: Current consensus EPS and revenue forecasts for Alphabet’s June-end quarter stand at $1.34 and $72.82B, respectively, according to data provided by Refinitiv. That $1.34 EPS estimate for the second quarter is up slightly from where it stood 90 days ago at $1.28 per share, according to Refinitiv. Bloomberg has a consensus adjusted EPS forecast of $1.44 for Alphabet’s fiscal Q2.

Among analysts tracked by Bloomberg that have updated their views on Alphabet within the last twelve months, 48 have Buy or equivalent ratings, 9 have Hold or equivalent ratings and the average twelve month price target of 45 of those analysts is $135.84.