Google Q3 Earnings Preview: Advertising, Cloud and Capex

Google is set to announce its Q3 earnings on October 29th, after U.S. markets close. Here are key focal points:

Advertising:

Google remains the world's undisputed leader in search. Data shows that as of September 30th, Google's web traffic rose 1% from the previous quarter, reaching 2.7 billion visits, while Bing, its closest competitor, saw a 3% drop to just 58 million visits. Google's daily active users (DAU) for Q3 grew about 1% quarter-over-quarter and 6% year-over-year.

However, even Google must remain vigilant. Google's search dominance is being challenged as fast-rising competitors like TikTok and Amazon capture market share. In fact, Google's share of the U.S. search ad market is expected to dip below 50% next year—a first in over a decade.

Google Cloud:

In the second quarter, Alphabet's results revenue from Google Cloud surged 28% YoY. Can such high growth be sustained? Let's wait and see.

YouTube:

YouTube outpaced Instagram and TikTok in DAU growth over the last quarter. In July, August, and September, YouTube maintained positive DAU growth, while its three main competitors saw declines. Additionally, YouTube extended the maximum length of Shorts from 1 minute to 3 minutes, improving monetization potential.

Other Growth Areas:

Alphabet has several potential revenue drivers that have yet to impact its bottom line. Waymo, Alphabet's autonomous driving unit, has partnered with Uber to offer driverless rides in Atlanta and Austin. Additionally, Alphabet's Cloud division, which posted $10 billion in revenue and $1 billion in operating profit in Q2, holds strong growth potential.

Capital Expenditure:

In July, CEO Sundar Pichai stated, "The risk of underinvesting is dramatically greater than the risk of overinvesting for us." However, Wall Street's patience is limited; investors are looking for returns on AI investments sooner rather than later. Progress in AI commercialization will be a key focus in this earnings report.

Antitrust Concerns:

The U.S. Department of Justice has launched an antitrust investigation into Google, hinting at a potential breakup. However, history suggests that forced breakups are rare. Google's relatively low valuation already reflects the policy risks it faces.