Alphabet Q2 Preview: Higher D&A Expected to Weigh on Earnings, AI Monetization to Slow But Continue

Alphabet's Q2 earnings are expected to be weighed down by higher depreciation and amortization. AI monetization is slowing but continues to grow. The stock has underperformed the Nasdaq 100 index by nearly 9% since early April and lags peer Meta.

Alphabet Inc. (GOOGL) is set to report its Q2 earnings this quarter, with analysts forecasting a solid performance despite challenges. The company's infrastructure advantage, driven by its investment in AI, remains a significant strength. However, higher depreciation and amortization costs, along with slowing AI monetization, are expected to weigh on the results.

Earnings Expectations

Analysts anticipate Alphabet's Q2 earnings to be $2.14 per share, up 13.2% year-over-year (YoY), with revenues of $79.25 billion, up 11.1% YoY [2]. The search revenue is expected to rise 11% YoY, while Google Cloud is projected to generate $13.04 billion, up 15.8% YoY. However, higher depreciation and amortization costs are expected to offset some of these gains.

Market Performance and Price Targets

Alphabet's stock has underperformed the Nasdaq 100 index by nearly 9% since early April, lagging behind peer Meta (META). Despite this, analysts remain optimistic. Bank of America raised its price target for Alphabet to $210 from $195, maintaining an Overweight rating [1]. Cantor Fitzgerald and Needham also raised their stock price targets for Alphabet, with Cantor Fitzgerald increasing its target to $196 and Needham raising its target to $210 [1].

AI Monetization and Infrastructure Advantage

Alphabet's investment in AI, while slowing, continues to grow. The company's infrastructure advantage, which includes a comprehensive ecosystem from silicon to software tailored for AI, remains a key differentiator. This ecosystem ensures the highest results through cohesion of all parts, contributing to Alphabet's overall financial performance [3].

Market Sentiment

Investors are watching Alphabet's performance closely, with some betting on the year-to-date (YTD) gap closing against Meta. The overall tone ahead of Q2 results is more risk-on versus the prior quarter, with elevated volatility as investors adjust their positioning [4]. Wells Fargo has recommended Alphabet as one of the "best tactical longs" into earnings, citing potential foreign exchange (FX) tailwinds and a recovery in paid search volumes [3].

Conclusion

Alphabet's Q2 earnings are expected to show a solid performance despite challenges. The company's infrastructure advantage and continued investment in AI remain key strengths. However, investors should closely monitor the earnings report for insights into the impact of higher depreciation and amortization costs and the state of AI monetization.

References

[1] https://www.investing.com/news/analyst-ratings/keybanc-raises-alphabet-stock-price-target-to-215-on-ai-momentum-93CH-4138806
[2] https://finviz.com/news/107828/curious-about-alphabet-googl-q2-performance-explore-wall-street-estimates-for-key-metrics
[3] https://www.investing.com/news/stock-market-news/amazon-and-these-2-stocks-are-best-tactical-longs-into-q2-earnings-wells-fargo-4143470
[4] https://www.investors.com/news/technology/microsoft-stock-hovers-record-high-fiscal-q4-earnings/