Alphabet Earnings Preview- What to watch
AInvestTuesday, Jul 23, 2024 2:01 pm ET
3min read
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Alphabet Inc. (GOOGL) will report its Q2 earnings this afternoon, with analysts expecting EPS of $1.84 and revenues of $84.2 billion. Analysts are optimistic, noting strong Google Search performance, with an updated Q2 revenue growth estimate of 12.8% year-over-year, higher than their previous 12.0% forecast. Consolidated Q2 revenue growth is projected at $84 billion or approximately 12.8%.

Key areas of focus for the upcoming report include Alphabet's advancements in AI, particularly with the Gemini 2 model, and its impact on various business segments. Analysts are closely watching the growth in Google Search, Cloud, and YouTube, with expectations of solid performance driven by AI enhancements and effective monetization strategies. Google Cloud’s revenue is expected to continue its strong growth, which was 28% in Q1, bolstered by new AI integrations such as Gemini for Meetings and Messaging, and enhanced AI training methods from DeepMind.

Additionally, Alphabet's financial performance remains robust, supported by significant advertising growth and AI-driven market dominance. Analysts also highlight Alphabet's strong balance sheet and dividend prospects, suggesting potential for substantial dividend growth in the future. With positive commentary from agencies and increased spending intent, Alphabet is poised for a strong Q2 report, reflecting its technological strides and market leadership in AI.

Google (GOOG) reported strong Q1 results, significantly exceeding analysts' expectations and demonstrating the immediate impact of its substantial investments in AI technologies, including Gemini 1.5. Unlike Meta Platforms (META), which indicated that its AI investments might take years to generate meaningful returns, Google showcased a more immediate payoff. This reassurance eased concerns among investors and analysts about the potential threat of generative AI to Google's core search business. Google's Search and Other revenue saw a 14.4% year-over-year increase to $46.2 billion, with robust performance particularly in the retail vertical within the APAC region.

YouTube also had a stellar quarter, with ad revenue rising by 21% year-over-year to $8.09 billion, driven by both direct response and brand advertising. The success of Shorts, Google’s response to TikTok’s short-format videos, contributed significantly, as its monetization rate more than doubled over the past year. Overall, Google's advertising business posted a 13.0% increase in revenue to $61.6 billion, reinforcing that advertising spending remains strong. Notably, AI has been integrated across the ads ecosystem, enhancing targeting, bidding, measurement, and ad creation, with Performance Max campaigns showing promising results.

Google Cloud also reported impressive growth, with revenue increasing by 28.5% to $9.57 billion, outpacing last quarter's 26% growth and surpassing expectations. AI has been a key driver here as well, with new AI-based features like Gemini for Meetings and Messaging and Gemini Security for Workspace boosting the segment's performance. Cloud’s operating income surged by $900 million from $191 million a year ago. Additionally, Google initiated its first dividend program with a $0.20 per share dividend and authorized up to $70.0 billion in stock repurchases. These shareholder-friendly moves, combined with the strong Q1 results, bolster confidence in Google's ability to not just survive but thrive in the AI era.

Google's valuation, based on the P/E Non-GAAP (FWD), EV/EBITDA (FWD), and Price/Cash Flow (FWD) metrics, provides an insightful look into its current market position compared to its historical performance. The current P/E Non-GAAP (FWD) ratio is 23.92, which is 6.88% below its five-year average of 25.68. This indicates that, on a forward-looking basis, Google is trading at a slight discount relative to its historical valuation. The P/E ratio suggests that investors are currently valuing Google's future earnings somewhat lower than they have over the past five years.

Similarly, the EV/EBITDA (FWD) ratio stands at 14.97, which is 8.39% above its five-year average of 13.82. This increase suggests that investors are currently willing to pay more for Google's EBITDA compared to its historical average, possibly reflecting confidence in the company's operational efficiency and earnings before interest, taxes, depreciation, and amortization. Furthermore, the Price/Cash Flow (FWD) ratio is 20.97, which is 16.33% higher than the five-year average of 18.02. This indicates that the market is placing a higher value on Google's future cash flow generation capabilities compared to its past, highlighting the strong cash flow prospects perceived by investors. Together, these metrics illustrate a mixed valuation picture, with the company trading at a slight discount on earnings but a premium on operational and cash flow metrics, indicating robust investor confidence in Google's future financial performance.

On a side note, Waymo has begun testing a new robotaxi, built by Chinese electric automaker Zeekr (ZK), on public roads in San Francisco, marking the next phase of the Alphabet-owned company’s autonomous vehicle technology journey. Currently, there are only a few Zeekr vehicles in San Francisco, and they are not yet driving autonomously. This public testing milestone follows Waymo's announcement in December 2021 to build an electric autonomous ride-hail vehicle with Zeekr for the U.S. market.

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