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Alphabet Earnings Preview: Tech Titans Battle for AI and Cloud Supremacy
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Alphabet (GOOGL - Free Report) , one of the world’s foremost technology companies, and operator of the monopoly search engine Google, reports earnings Tuesday, July 25.
While Alphabet’s core business, advertising revenue from search is expected to see a reacceleration after mixed results over the last year, there are new avenues of growth investors can look forward to. Namely, Artificial Intelligence and Cloud Services.
On the AI front, Alphabet is coming directly for the new leader Microsoft (MSFT - Free Report) , who had an extremely buzzy release of its new ChatGPT technology, and AI enabled Bing search.
In the Cloud, Amazon (AMZN - Free Report) is still the dominant player and Microsoft not far behind, but Alphabet is hoping to eek out a few more percentage points of market share over the coming years.
GOOGL stock has put up an impressive record over the last decade, compounding at 18.5% annually, however it has been bested by both AMZN and MSFT. Will the next decade be the same?
Microsoft announces earnings Tuesday, July 25 after the market closes and Amazon reports Thursday, July 27.
Image Source: Zacks Investment Research
Earnings Estimates
Alphabet has started seeing its earnings estimates revised higher over the last few months, giving it a Zacks Rank #2 (Buy) rating. Current quarter earnings expectations have been revised higher by 3% and are projected to grow 9.1% YoY. FY23 earnings estimates have been upgraded by 4.3% and are forecast to grow 18.2% YoY.
It is worth noting that the Zacks Earnings ESP is currently forecasting a 1.62% earnings beat from GOOGL.
Image Source: Zacks Investment Research
Bard Vs. Bing
While Microsoft’s ChatGPT exploded onto the scene, Alphabet’s Bard was not quite so exciting. The initial release of the technology felt a bit rushed, and many were initially critical of the platform following a demonstration that showed inaccurate information. It is hard to blame GOOGL for responding as quickly as possible, because although they own 94% of the search market, seeing ChatGPT in action must have created an existential threat.
Nonetheless, GOOGL has continued with its Bard product, and just this week announced that it would be usable across Europe and Brazil. And it may not be necessary to completely dominate the AI chat market for either Alphabet, Microsoft, or any other company for that matter.
Take search for instance, Google of course monopolizes the market, yet Microsoft’s Bing still manages to bring in $11 billion a year. In the same way, competing AI products may be able to coexist. Although whoever can offer the best product will likely take the lion share.
Cloud
Cloud services is a $600 billion market that is projected to grow 20% annually through 2030, thus the competition for users is fierce. Furthermore, Artificial Intelligence will likely play an important role in growing cloud usage. Because of the tremendous data usage and storage necessary to run these technologies they absolutely gobble up computing power.
Amazon, who has the advantage of being a first mover in the industry, currently reigns supreme with an estimated 32% of global market share. However, Google Cloud is the fastest growing brand of the top three with 27.5% YoY growth reported at the most recent earnings meeting. Microsoft is the slowest with a 17% YoY increase, and AWS saw 20% YoY gains.
All three tech companies have seen a considerable slowdown in cloud computing sales growth, which concerns many investors as they are major contributors to the company’s overall growth. But there is a light at the end of the tunnel.
While the broader economy was able to avoid a recession, there is no doubt the technology sector experienced a painful contraction. But things are beginning to look up again, and if the tech industry can gain steam, it could lead to a strong reacceleration in cloud growth.
Image Source: Statista
Valuation
Alphabet is currently trading at a rather appealing valuation. At 23.1x one year forward earnings it is just above the broad market average of 21.3x, and well below its 10-year median of 26.5x. It is not often you get to buy a company as high quality as GOOGL below its median valuation.
Image Source: Zacks Investment Research
Bottom Line
With multiple developing brands across some of the highest velocity segments in the market, I think GOOGL is well positioned for the long-term. Furthermore, its historically discounted valuation, especially when compared to its peers, increases its potential to outperform. For reference, Microsoft is currently trading at 32.1x forward earnings, which is well above its 10-year median of 25x.
Of course, nobody knows exactly whether Alphabet will beat at next week’s earnings report, or how the market will respond to the news, but make no mistake GOOGL is as high quality a stock as they come.
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Alphabet Earnings Preview: Tech Titans Battle for AI and Cloud Supremacy
Alphabet (GOOGL - Free Report) , one of the world’s foremost technology companies, and operator of the monopoly search engine Google, reports earnings Tuesday, July 25.
While Alphabet’s core business, advertising revenue from search is expected to see a reacceleration after mixed results over the last year, there are new avenues of growth investors can look forward to. Namely, Artificial Intelligence and Cloud Services.
On the AI front, Alphabet is coming directly for the new leader Microsoft (MSFT - Free Report) , who had an extremely buzzy release of its new ChatGPT technology, and AI enabled Bing search.
In the Cloud, Amazon (AMZN - Free Report) is still the dominant player and Microsoft not far behind, but Alphabet is hoping to eek out a few more percentage points of market share over the coming years.
GOOGL stock has put up an impressive record over the last decade, compounding at 18.5% annually, however it has been bested by both AMZN and MSFT. Will the next decade be the same?
Microsoft announces earnings Tuesday, July 25 after the market closes and Amazon reports Thursday, July 27.
Image Source: Zacks Investment Research
Earnings Estimates
Alphabet has started seeing its earnings estimates revised higher over the last few months, giving it a Zacks Rank #2 (Buy) rating. Current quarter earnings expectations have been revised higher by 3% and are projected to grow 9.1% YoY. FY23 earnings estimates have been upgraded by 4.3% and are forecast to grow 18.2% YoY.
It is worth noting that the Zacks Earnings ESP is currently forecasting a 1.62% earnings beat from GOOGL.
Image Source: Zacks Investment Research
Bard Vs. Bing
While Microsoft’s ChatGPT exploded onto the scene, Alphabet’s Bard was not quite so exciting. The initial release of the technology felt a bit rushed, and many were initially critical of the platform following a demonstration that showed inaccurate information. It is hard to blame GOOGL for responding as quickly as possible, because although they own 94% of the search market, seeing ChatGPT in action must have created an existential threat.
Nonetheless, GOOGL has continued with its Bard product, and just this week announced that it would be usable across Europe and Brazil. And it may not be necessary to completely dominate the AI chat market for either Alphabet, Microsoft, or any other company for that matter.
Take search for instance, Google of course monopolizes the market, yet Microsoft’s Bing still manages to bring in $11 billion a year. In the same way, competing AI products may be able to coexist. Although whoever can offer the best product will likely take the lion share.
Cloud
Cloud services is a $600 billion market that is projected to grow 20% annually through 2030, thus the competition for users is fierce. Furthermore, Artificial Intelligence will likely play an important role in growing cloud usage. Because of the tremendous data usage and storage necessary to run these technologies they absolutely gobble up computing power.
Amazon, who has the advantage of being a first mover in the industry, currently reigns supreme with an estimated 32% of global market share. However, Google Cloud is the fastest growing brand of the top three with 27.5% YoY growth reported at the most recent earnings meeting. Microsoft is the slowest with a 17% YoY increase, and AWS saw 20% YoY gains.
All three tech companies have seen a considerable slowdown in cloud computing sales growth, which concerns many investors as they are major contributors to the company’s overall growth. But there is a light at the end of the tunnel.
While the broader economy was able to avoid a recession, there is no doubt the technology sector experienced a painful contraction. But things are beginning to look up again, and if the tech industry can gain steam, it could lead to a strong reacceleration in cloud growth.
Image Source: Statista
Valuation
Alphabet is currently trading at a rather appealing valuation. At 23.1x one year forward earnings it is just above the broad market average of 21.3x, and well below its 10-year median of 26.5x. It is not often you get to buy a company as high quality as GOOGL below its median valuation.
Image Source: Zacks Investment Research
Bottom Line
With multiple developing brands across some of the highest velocity segments in the market, I think GOOGL is well positioned for the long-term. Furthermore, its historically discounted valuation, especially when compared to its peers, increases its potential to outperform. For reference, Microsoft is currently trading at 32.1x forward earnings, which is well above its 10-year median of 25x.
Of course, nobody knows exactly whether Alphabet will beat at next week’s earnings report, or how the market will respond to the news, but make no mistake GOOGL is as high quality a stock as they come.