When Alphabet reports second quarter earnings on July 23, analysts will look for management's view on the roll out of "AI Overviews" — Google's generative artificial intelligence search product. Google stock has climbed 32% in 2024 as investor fervor over generative AI drives big gains in technology companies.
Meanwhile, Google stock hit a new intraday high of 191.75 on July 10 but closed down a fraction. Tech stocks, including Nvidia and Meta Platforms, sold off on July 11. Also, Google stock retreated 2.9%. The Nasdaq Composite dipped nearly 2% but is still up 24% this year.
What's going on?
"The AI trade is under increasing scrutiny," said Goldman Sachs analyst Ryan Hammond in a research note.
The impact of generative AI on Google's core internet search advertising business remains a key issue. Google has embedded its Gemini AI model tools and chatbot AI technology into its search engine.
Economist Ed Yardeni had a different take on June's lower-than-expected CPI report. "It does increase the odds of a cut in the federal funds rate in September," Yardeni said in a report. "That supports our expectations for the stock market rally to continue and to broaden out from the MegaCap-7. Indeed, the Russell 2000 rose, while the S&P 500 and Nasdaq declined as investors rotated into S&P 600 SmallCap and S&P 400 MidCap stocks. These so-called 'SMidCaps' have been weighed down by high interest rates and have remained relatively cheap since the Fed tightened monetary policy."
Also, Q2 financial results will test the valuation of Google stock and the Magnificent Seven.
Amid the 2024 gain of Alphabet stock so far, whether the internet giant is a buy depends on fundamental and technical factors as well each investor's own goals, strategy and risk tolerance.
Further, Alphabet ranks No. 20 in the IBD 50 roster of growth companies. It's also on the IBD Big Cap 20 and IBD Stock Spotlight lists.
Out of 19 analysts polled by Visible Alpha, 16 rate Google stock a buy heading into the Q2 earnings report. Three analysts have hold ratings on GOOGL stock.
Google Stock: Q2 Earnings Due
For Q2, analysts model 27% EPS growth to $1.83, with revenue climbing 13% to$84.1 billion. Also, investors are focused on operating expenses and profit margins as capital spending jumps.
When announcing the hiring of Anat Ashkenazi as CFO, Google said she would start effective July 31. So investors will likely have to wait until Google's Q3 earnings call to get Ashkenazi's views on business operating trends and long-term financial goals.
Ashkenazi has held diverse financial, strategy, and operations roles at pharmaceutical giant Eli Lilly for over 23 years, including serving as CFO for the past three years.
Google reported first-quarter earnings and revenue that handily beat consensus estimates. The internet giant announced its first-ever dividend and a new $70 billion stock buyback. In Q1, Google's capital spending jumped 91% to $12 billion, up from $11 billion in the December quarter and $6.3 billion in the year-earlier period.
Despite fast-rising capital spending amid AI investments, Google told analysts it expects operating margins to expand in 2024 as it moderates expense growth and targets efficiency gains across the business.
While capital spending is trending up, Bank of America forecasts that Google's free cash flow will boom to $118 billion in 2026, up from $103 billion in 2025, $81 billion in 2024 and $69 billion in 2023.
Alphabet In AI Battle With Microsoft
Meanwhile, amid the emergence of generative AI, there's debate over whether Google stands out as a tech industry leader or lags startup OpenAI. Also, Google stock is among many AI stocks to watch.
One big question for Alphabet's search business: how will integrating chatbot AI technology into internet search queries impact advertising revenue? Google has embeded its Gemini AI model tools directly into its search engine.
In addition, Google aims to counter Microsoft's investment in OpenAI by making its own generative AI tools available to software developers. Google's large language model (LLM) is called Gemini.
At Google Marketing Live 2024 in May, the company introduced new products and features for advertisers that include ad placement across the new "AI Overviews," formerly Search Generative Experience, format.
DOJ Anti-Trust Case Ruling Looms
Meanwhile, a ruling in the Justice Department's nonjury antitrust trial vs. Google could come soon.
The government alleges Google maintains an internet search monopoly "through exclusionary distribution agreements that steer billions of search queries to Google each day." Google's payments to Apple are under scrutiny in the anti-trust lawsuit.
If Google loses, U.S. District Judge Amit Mehta could order a Google breakup or changes to the way Google promotes its search engine. Google will likely appeal any court decision.
Due to its huge cash holdings, Google has shrugged off three fines totaling $9.3 billion levied by the European Union on antitrust grounds.
Analysts say Google stock is getting a boost from the Performance Max advertising platform. It automates buying across YouTube, internet search, display, Gmail, maps and other applications. Performance Max lets advertisers manage campaigns across all Google ad inventory. Advertisers that use the tools convert more shoppers into buyers, Google says.
Alphabet's Cloud Computing Growth Key
Aside from Google's core internet search advertising business, Wall Street analysts view growth at YouTube and cloud computing as key. Another question is the performance of Google's hardware business, where it's battling Apple in smartphones.
Google hosts an event Aug. 9 to showcase new AI-ready Pixel 9 mobile phones.
Google aims to slow down the growth of TikTok with its own short video platform. How much money Google generates from YouTube Shorts is a key issue for 2024, analysts say. YouTube Shorts now generates roughly 70 billion daily views.
In cloud computing, Google is still the third biggest service provider, behind Amazon.com and Microsoft. Like Amazon Web Services and Microsoft' Azure business, Google's cloud unit has upped capital spending targeting the new opportunity in generative AI.
Google's 2022 acquisition of cybersecurity firm Mandiant for $5.4 billion seems to be paying dividends. Mandiant is part of Google's cloud-based cybersecurity services.
Further, Alphabet's money-losing "Other Bets" and Moonshots are company assets that investors should monitor for new developments, according to an IBD report. While the roll-out of robo-taxi services by Waymo has lagged expectations, it's still viewed as a leader in autonomous vehicles.
Google Stock: Is It A Buy Or Sell Now?
Alphabet has turned in good and bad years recently. Shares jumped 65% in 2021 but in 2022 dropped 39%. Despite mounting competition in AI and internet search, Alphabet advanced 58% in 2023.
Also, the Relative Strength Rating of Google stock currently stands at 93 out of a best-possible 99, according to IBD Stock Checkup. The best stocks tend to have an RS rating of 80 or better. The relative strength line has tumbled.
Google stock holds an Accumulation/Distribution Rating of B-minus. That institutional ownership rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
Further, shares hold an IBD Composite Rating of 99 out of a best possible 99. The best growth stocks have a Composite Rating of 90 or better.
On MarketSurge, Google stock holds an entry point of 153.78. As of July 11, Alphabet is extended and trades above a 5% buy zone. Long-time holders could take profits.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
