Alphabet results to set tone for Big Tech on advertising, cloud

All eyes are on Alphabet Inc.’s earnings report to set the tone for how megacap technology companies fared in the second quarter.

Alphabet, which has gained more than 16% since its blowout first-quarter report, needs to show that spending on AI is continuing to drive revenue in its cloud and advertising businesses. The results also come on the heels of a broader tech selloff, with the Nasdaq 100 Index tumbling nearly 6% in just over a week. That, in addition to tough comparisons with last year, has created a cautious backdrop ahead of Tuesday’s earnings release.

“This isn’t the big acceleration quarter, but I think that they will do slightly better than consensus and give a good September guide,” said Rhys Williams of Wayve Capital Management LLC, adding that Alphabet needs to “directionally talk about what AI is doing to their overall revenue stream.”

Wall Street analysts expect the company to report $84.4 billion in revenue in the second quarter, a 13% jump from the same period last year but marking a deceleration from last quarter. Advertising, which includes the search and YouTube businesses, is expected to bring in $64.5 billion, up 11% compared with last year, helped by Google’s AI improvements to search.

The results, and Alphabet’s guidance ahead of the Olympics and the November US Presidential election – two major events that should benefit ad spending – have read-through to companies including Meta Platforms Inc., Snap Inc. and Pinterest Inc.

Bank of America’s Justin Post expects the results to “set a positive backdrop” for peers. He recently boosted his second-quarter estimate for Alphabet’s search business. “In the near-term, we think revenue upside from AI-driven monetization improvements will be a key 2Q takeaway,” Post said.

Analysts will also be watching Google’s spending. Capital expenditure came in higher than expected last quarter, though Wedbush analysts led by Scott Devitt said that expectations for near-term capex have now “caught up to reality.”

“While a negative surprise related to spending remains a risk for Alphabet (and all of megacap internet), we think the chances are relatively low in 2Q,” Devitt wrote.

The company has spent significantly on developing AI services in its cloud business, which competes with Amazon.com Inc.’s AWS and Microsoft Corp.’s Azure. Cloud was one of the key factors behind Google’s first quarter beat, and Truist analysts led by Youssef Squali expect this quarter’s results to be supported by a sustained performance in cloud as well.

A solid report from Alphabet on cloud would have positive implications for Amazon, Microsoft and even Nvidia Corp., as it may signal that investments in AI chips will need to continue through next year.

Among other developments, this quarter will also mark the last before Anat Ashkenazi takes over as chief financial officer at the end of the month, replacing Ruth Porat. Investors will also be interested in M&A, after cybersecurity startup Wiz Inc. turned down a takeover bid from Google, according to a memo reported by Bloomberg today. Alphabet also recently shelved its pursuit of HubSpot Inc., a customer relationship management software maker, Bloomberg reported previously.

“We are looking for more details around “efficiency” as the theme was more prevalent in the April call and perhaps the new CFO, Anat Ashkenazi, will look to cut a bloated structure even further,” Melius Research analyst Ben Reitzes wrote in a recent note.

Reitzes noted that Google shares have been strong since its first-quarter report amid optimism around “costs, cloud momentum and improvement in AI execution.”

“Management needs to show real commitment to these themes for the stock to keep going,” he said.