Alphabet shares edged lower in early Wednesday trading, following a broader decline in megacap tech stocks, despite a bullish note from a key Wall Street analyst heading into its second-quarter earnings report next week.
The Google (GOOGL) parent has been one of the top performing Magnificent 7 stocks so far this year, adding more than $520 billion in market value as investors bet that its drive into artificial-intelligence technologies, as well as its ongoing dominance in search and ad sales, will cement the group's position in the new global tech framework.
Alphabet in fact flexed some of that recently added muscle this week when it was reportedly linked to advanced talks to buy cybersecurity startup Wiz for around $23 billion, a move would mark its biggest-ever acquisition and a bold challenge to current U.S. tech regulations by CEO Sundar Pichai.
Separate reports also suggest that Pichai abandoned early talks with online marketing software group HubSpot, which could have valued the Boston group at around $25 billion.
Analysts at BMO Capital Markets, however, see Google's legacy dominance in online search, supported in part by the introduction of it AI-powered Gemini chatbot, providing a more tangible near-term boost for the stock and its prospects heading into next week's Q2 earnings report.
Google search gives a boost
BMO analysts see search generating around $197 billion in revenue this year, a tally it expects to rise to $217 billion in 2025.
"Search share has increased by (1.3 percentage points) in the U.S. and (3.1 percentage points) globally over the past year, attributed to repeat query behavior and the proliferation of chatbots embedded in most apps," the investment bank said in a note. Its analysts lifted its Alphabet price target by $7 to $222 a share.
"Consequently, we are raising our (second quarter) search estimate to +13.5% year-over-year from 13%, given continued strength across verticals and better-than-expected channel checks," the team added.
Related: Google could make its biggest acquisition ever: What is Wiz?
Google's AI push is also adding heft to YouTube, which BMO analysts say is benefiting from increased user engagement and more effective ad monetization. A further pullback in ad spending on TikTok is providing a further boost.
This spring President Joe Biden signed legislation that gives China-based ByteDance, TikTok's parent, until Jan. 19 to divest its U.S. assets or face a complete ban in the world's largest economy.
AI benefits for YouTube
"We now expect YouTube revenue to reach $37 billion in 2024 and $43 billion in 2025, compared to previous estimates of $36.5 billion and $42 billion," BMO said.
"We also predict significant growth for Google cloud, driven by dual-cloud adoption among enterprises," BMO said. "We model a 28% growth for Google Cloud, with potential upside in the second half of 2024 due to growth in gen AI workloads and easier comparisons relative to" the first half.
Alphabet is scheduled to report for Q2 after the close of trading on July 23, with analysts looking for a bottom line of $1.84 a share on revenue of around $84.2 billion.
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In April the Mountain View, Calif.-based group unveiled plans for its first-ever dividend following stronger-than-expected first-quarter earnings as well as details of a $70 billion stock buyback. The two moves were seen as an attempt to soften the blow of accelerated AI- and capital spending plans.
Related: Analysts reboot Google parent stock price target ahead of earnings
Google doled out $12 billion in capital expense over Q1, with outgoing chief financial officer Ruth Porat telling investors to expect higher spending through to at least year's end.
Alphabet shares were marked 0.53% lower in premarket trading to indicate an opening bell price of $184.52 each. Such a move would still leave the stock more than 30% higher for the year.
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