The threat to search and investment in AI: what signals Wall Street is waiting for in Alphabet's report

"Alphabet's report could set the tone for the whole tech giant season" - with such expectations the market is preparing for the publication of quarterly results of Google's parent company on July 23. Against the backdrop of the upcoming release, the securities are already showing increased volatility: the market is plotting a move of up to 6% - above average. Analysts remain positive and consider Alphabet one of the most undervalued companies among the "Magnificent Seven". The focus is on two key issues: multi-billion dollar investments in data centers for AI and the position of the search business, which is under pressure for the first time in many years..

In Alphabet's second-quarter report, which it will release after the close of trading on July 23, the company will report a 15% year-over-year increase in earnings per share to $2.18, according to a Wall Street consensus forecast that citesBarron's. Analysts expect revenue at $94 billion, suggesting an 11% increase. 

The main drivers, according to their estimates, should be advertising in search and on YouTube, as well as Google Cloud, whose revenues could exceed $13 billion. Analysts expect the cloud division to show growth of 27% - faster than other areas. At the same time, failure in this segment may seriously affect the market reaction after the publication of the report. 

Alphabet continues massive investment in data centers for AI: $53 billion in 2024 and a planned $75 billion in 2025. About $18 billion in capital spending is expected in the second quarter. Any deviation from these estimates could raise questions about the effectiveness of AI infrastructure investments, Barron's warned.

Special attention is paid to the advertising business, which accounts for 76% of the company's revenue in 2024. According to forecasts, it will add 8%, with the main driver - search advertising - expected to grow by 9%. However, it is this segment that is now under pressure: for the first time in years, Google's dominance in search is in question. New AI services - from OpenAI to Perplexity - offer users more detailed and personalized answers, drawing attention away from classic search.

In response, Google has introduced an AI sammari that appears on top of search results and is testing an experimental AI Mode that mimics competitors. Nevertheless, the company's share of global search (excluding China) is still hovering around the 90% mark, Barron's notes. Its decline could hit earnings and growth estimates.

Quotes are expected to move $11 from the last closing level of $191, accounts analysts at Visible Alpha. That could take the stock to the $202 mark or down to $181. On average this year, the company's securities have fluctuated 4.4% after reports. 

Wall Street is generally optimistic about the long-term prospects of Google's owner ahead of the report, with 15 of the 19 analysts tracked by Visible Alpha recommending buying its stock and the rest advising a hold. Meanwhile, the consensus target price is just 6% higher than the current price, followed from MarketWatch data.   

- Jefferies maintains its $210 target, noting that demand for cloud and AI solutions is supporting Cloud growth.

- Cantor holds a neutral rating but raised the target from $171 to $196, emphasizing the company's strong AI position.

- Bank of America also raised its target price to $210 from $200, recalling that the fate of the antitrust case against Google remains unresolved and worries investors.

- Luke O'Neil of CooksonPeirce thinks that if the company's results meet forecasts, the stock looks attractive: "There are questions about regulators and the impact of AI, but no reason to be pessimistic yet."

- Keith Gangle of Gradient Investments advises to buy Alphabet shares before the report: the securities are up 8% in July, but still lagging the market. In his opinion, Alphabet is the most undervalued company of the "Magnificent Seven".

Right now, Alphabet traded s trading at a multiple of about 18 to projected earnings - that's below their ten-year average and markedly cheaper than Microsoft, which has that multiple of 33. Despite progress in AI, shares of Alphabet have underperformed the Nasdaq 100 this year and are the worst performing of the "Magnificent Seven" after Apple and Tesla. 

Alphabet's value has been virtually unchanged since the beginning of the year, but growth has accelerated in the last three months - and quotes have added 22%. On Wednesday, ahead of the publication of the report they fell by 0.8%. 

Investors will be watching the release of the report with an eye on an antitrust trial that is being called the most serious for the company in decades. The U.S. Justice Department is demanding that it sell the Chrome browser and stop paying manufacturers to install Google's default search engine. Alphabet itself calls the measures excessive, warning of risks to users and US technology leadership. A decision on the case is expected in August and could affect the entire market.

Until it is adjudicated, a shadow of uncertainty remains over Alphabet shares, said Futurum Group head Daniel Newman. 

This article was AI-translated and verified by a human editor