Before the Earnings Call

As Alphabet Inc. prepares to release its second quarter results today, July 25, 2023, after the market closes, it is experiencing an uptick in its stock price. Shares of Alphabet Inc. are up 1.22% today, a positive signal from investors keen on the tech giant’s performance, especially with AI advancements. Despite the general weakness in internet advertising spending, given the prevailing economic uncertainties, there is considerable interest in Alphabet’s AI exploits, and this could serve as a determinant for the performance of Alphabet’s shares after the earnings release.

AI Dominates Discourse

Alphabet, under the guise of Google, has established itself as a major player in the field of artificial intelligence (AI). AI was a significant topic during Alphabet’s previous earnings call held on April 26, 2023, with the term mentioned a staggering 36 times. This indicates the degree to which AI has been woven into the company’s strategic priorities and operations. Google aims to innovate and improve efficiency using AI, as its technology has been integral to various aspects of the company’s business, including search, advertising, and cloud services.

The AI space has become increasingly competitive, with Microsoft and Alphabet launching numerous AI-related products since Microsoft-backed OpenAI released ChatGPT in late 2022. Alphabet’s focus on AI, therefore, might be crucial for its success in the future, with investors watching closely to see how it handles this key aspect of its business.

Stock Performance and Market Expectations

The stock market performance of Alphabet has been quite impressive, with its stock up 39% year-to-date (YTD). This performance is comparable to the 46% rally of Microsoft and the 36% rise of the Nasdaq.

Analysts, on average, expect Alphabet’s quarterly revenue to increase by 4.5% to $72.82 billion, with an adjusted earnings per share (EPS) of $1.34 versus the $1.21 EPS reported a year ago. If the company meets these expectations, it would represent year-over-year EPS growth of 11% and revenue growth of 4.5%.

After the Earnings Call

The earnings call scheduled for 5:00 p.m. ET, right after the closing bell, will provide crucial insights into Alphabet’s financial health and business strategy. The results will give a glimpse into the state of the digital advertising market, which is a primary revenue source for many tech companies like Meta Platforms and Snap.

Review of Q1 2023 Performance

Alphabet surpassed earnings expectations last quarter after three consecutive EPS misses. This was partly due to cost-cutting measures, including a significant workforce reduction of 12,000 positions. This move resulted in a significant 6 percentage point increase in operating margin to 30%.

Google’s advertising revenue remained flat year-on-year at $54.5 billion in Q1, signaling a level of stability in the ad business. However, ad spending constraints persisted, especially on the YouTube platform, which saw a near 3% fall in Q1 ad revenue. Nevertheless, the company highlighted the success of YouTube Shorts, with an 80% surge in the number of channels uploading to Shorts.

Surprisingly, Alphabet’s Cloud segment turned profitable for the first time, generating a revenue growth of 28% and posting a positive operating profit of $191 million. This positive development might be a focal point in the Q2 earnings report as investors and analysts will look for further profitability improvements.

The Role of AI and Share Buyback

AI will undoubtedly remain the core focus during the earnings call, given Google’s recent advancements and focus on its BARD chatbot. As part of its AI-first strategy, Google intends to deploy AI across all product areas, including advertising. Also, it aims to leverage AI to optimize cost efficiencies by reallocating workloads within data centers.

Alphabet also announced an additional $70 billion stock repurchase authorization in its Q1 report, providing another EPS lever to pull. This represents a significant move by the company to return wealth to its shareholders and could impact the stock’s performance in the days following the earnings release.

Overall, the Q2 results and subsequent conference call will offer valuable insights into Alphabet’s business strategy, financial health, and growth trajectory. The outcomes could also have broader implications for the tech sector, particularly for companies heavily invested in digital advertising and AI technologies.