Alphabet to Report Q2 Earnings Tuesday; Focus on AI and Ad Spend

Alphabet’s Fiscal Q2 Earnings and the Digital Advertising Market

Alphabet, Google's parent company, is set to announce its fiscal second-quarter earnings, providing Wall Street a chance to gauge the digital advertising market's health and whether the excitement around generative AI translates to revenue growth. The tech conglomerate had an outstanding first quarter, marked by the introduction of its maiden dividend of $0.20 per share and authorization of $70 billion in stock repurchases. Alphabet’s shares have surged 30% so far this year, outpacing Microsoft’s 18% and Amazon’s 22% respective gains.

Investments in Generative AI

All three tech giants—Alphabet, Microsoft, and Amazon—are heavily investing in expanding their generative AI capabilities, particularly in data centers that can support AI models offered through their cloud service platforms. This quarter, analysts predict Alphabet will report earnings per share of $1.85 on $84.35 billion in revenue, a significant leap from last year's $1.44 per share on $74.6 billion in revenue. Advertising revenue is expected to hit $64.5 billion, up from $58.1 billion the previous year, indicating a robust advertising landscape.

Analyst Expectations

Jefferies’ analyst Brent Thill forecasts that advertising spending will be consistent with or even exceed Q1 levels, citing healthy fundamentals, strong ad spend, and potential boosts from events like the Olympics and elections. Similarly, Wedbush's Scott Devitt anticipates ongoing strength in Google Search, based on ad surveys and agency feedback, suggesting a positive outcome for the second quarter.

Cloud Services Performance

For Google Cloud, Wall Street expects $10.1 billion in revenue and $982.2 million in operating income, up from last year’s $8 billion in revenue and $395 million in operating income. Although Google Cloud still lags behind Amazon and Microsoft, the segment is growing, and Alphabet is optimistic that its generative AI investments will eventually enhance revenue and attract more customers. However, the precise timing of when AI will significantly contribute to Google Cloud or its ad business remains uncertain. Thill’s note mentions that substantial AI revenue may become evident by 2025-26, as many companies are currently in pilot stages.

Challenges with Generative AI in Search

Regarding Google's search engine, Devitt suggests that AI search overviews could boost user engagement and positively impact Search monetization over time. Google's generative AI feature, AI Overview, launched in May, initially faced accuracy issues, leading the company to scale back some features. As generative AI remains a hot topic this earnings season, it's yet to be determined how significantly it will impact companies' financials.

Alphabet’s earnings report will offer early insights into whether generative AI is starting to generate meaningful revenue, setting the stage for other Big Tech companies to follow.