Google Q3 Earnings Preview: Advertising as Its Core and AI as Its Edge, Will TPU Commercialization Spark a Valuation Rerating?

Google Q3 Earnings Preview: Advertising as Foundation, AI as Spearhead, Can TPU Commercialization Drive Revaluation?

TradingKey - AI cloud giant and Google parent Alphabet (GOOG、GOOGL) is set to report its Q3 2025 earnings after market close on Wednesday, October 29. Analysts expect strong results, fueled by core advertising growth, robust AI cloud demand, and promising TPU commercialization, potentially re-rating the stock beyond its $3 trillion market cap.

According to SeekingAlpha data, analysts project Google's Q3 2025 revenue to grow 13.4% year-over-year to $100.11 billion. Earnings per share (EPS) are expected to increase 6.6% year-over-year to $2.26.

Tipranks data shows Google has exceeded EPS expectations for nine consecutive quarters, suggesting Wall Street continues to underestimate its robust profitability and growth potential.Nevertheless, analysts' EPS estimates for the last quarter remain conservative, citing factors such as anticipated higher-than-expected advertising spend, significant AI capital expenditures potentially eroding profits, and elevated R&D costs.

【Google Historical EPS, Source: Tipranks】

Analysts note that the slight discrepancy between revenue and EPS growth rates suggests cost growth could outpace revenue. However, higher cost projections are deemed reasonable, as these investments are crucial for Google to maintain its market leadership. Furthermore, given the company's historically strong return on invested capital (ROIC) performance, the long-term return prospects for new projects appear promising.

Evolving from a search and advertising leader into an AI behemoth, Google's business now spans web search, digital advertising, cloud services, and AI software and hardware. Google Services (including Google Search and YouTube ads), Google Cloud, and Other Bets form Google's three primary revenue streams. The former two contributed 85.60% and 14.13% respectively to total revenue in Q2 2025.

Wall Street consensus forecasts indicate Google's core advertising business continued to grow by 10% or more last quarter, despite challenges from competitors like AI browsers. In the cloud race, Google Cloud is projected to sustain a high growth rate of approximately 30%, catching up to industry leader Amazon Web Services (AWS).

Encouragingly, Google's proprietary TPU chip, a decade in the making, has achieved a significant milestone in its commercialization and diversification. This comes after Anthropic's multi-billion dollar procurement agreement, which enhances its visibility.

Advertising Business: Google's Enduring Cash Cow

Google's total advertising revenue in Q2 grew 10.4% year-over-year to $71.3 billion, with both search and YouTube ad revenues surpassing market expectations. For Q3, analysts project Google's advertising revenue to increase 10% year-over-year to $72.45 billion, and YouTube ad revenue to rise 12.4% to $10.02 billion, underscoring the segment's resilience amidst tariff concerns and macroeconomic uncertainties.

Bank of America analyst Justin Post, who recently raised Google's price target from $252 to $280, stated that Google's advertising business will continue to see robust growth. He added that even a slight decline in organic search traffic would be offset by increased spending across several core categories.

With Perplexity launching its AI browser Comet and, more recently, OpenAI introducing Atlas, concerns are mounting that emerging AI browsers could erode Google Chrome's search market share. Furthermore, the integration of AI technology itself raises questions about whether it will diminish user reliance on Google Search.

In response, Google is addressing these concerns with tangible data. Google CEO Sundar Pichai noted in July that its AI overview tool's monthly active users surged from 1.5 billion in Q1 to over 2 billion, indicating AI is expanding how people search for and obtain information.

This statement emphasizes that embedding Gemini within its core search business is not a detriment, but rather a powerful tool to accelerate the monetization of keyword search advertising.According to StatCounter, Google still commands over 90% of the search market, significantly outperforming Microsoft Bing's 4.08% and Yandex's 1.65%.

Cloud Business Maintains High Growth, TPU Commercialization Reshapes Narrative

To date, Amazon AWS remains the leader in cloud services with approximately 30% market share, while Microsoft Azure and Google Cloud are actively pursuing with 20% and 13% shares, respectively.

Visible Alpha data indicates the market expects Google Cloud revenue to post a 30.1% year-over-year growth rate in Q3, compared to 38.4% for Microsoft Azure and 18% for Amazon AWS.

Bank of America projects Google Cloud's Q3 growth rate to reach 32%, noting that AI-driven efficiency improvements will contribute to core margin expansion. Additionally, data compiled by Zacks Investment suggests Google Cloud's revenue for the quarter will climb 29.1% year-over-year to $14.66 billion.

Excitingly, Google's proprietary TPU chip is experiencing its "GPT moment." Last week, AI unicorn Anthropic announced a partnership with Google to deploy one million TPU chips for training its AI model, Claude, a deal poised to generate tens of billions of dollars in future revenue for Google.

Google executives stated that Anthropic's extensive adoption of TPUs reflects their long-standing recognition of the chips' performance and efficiency.

Beyond Anthropic, Google's TPU clientele includes Safe Superintelligence, Salesforce, and Midjourney. Some commentators suggest that the Anthropic partnership is not merely about revenue but signifies a massive expansion of Google's AI ecosystem.The "King of Search" is demonstrating its capability to challenge Nvidia in AI hardware, establishing a moat in specific segments of the AI workflow outside Nvidia's dominant general-purpose GPU market.

Key Banc analyst Justin Patterson noted that this deal further proves Google Cloud is gaining market share, highlighting the strategic importance of TPUs.

Morgan Stanley reported that this transaction serves as a significant validation of Google's AI cloud strategy. It is poised to be a key driver for accelerating Google Cloud Platform (GCP) revenue growth in 2026 and beyond, potentially adding an extra 100 to 900 basis points to cloud revenue growth in 2026.

Is Google Undervalued?

According to TradingKey data, Wall Street's consensus price target for Google is $256.02, which is even below its latest price of $269.27. However, in terms of overall stock ratings, Google leads tech giants like Nvidia (8.11), Amazon (8.01), and Tesla (7.14) with a score of 8.19.

【Google Stock Rating, Source: TradingKey】

Year-to-date, Google's stock has surged 42.25%, outpacing the S&P 500's 16.89% gain over the same period. Driven by an easing of global trade tensions and optimistic expectations for its Q3 earnings, Google's stock recently hit a new all-time high, pushing its market capitalization past $3 trillion.

J.P. Morgan noted that Google is the second-best performing stock among the Magnificent Seven this year. Following a rebound of over 80% since April, the firm's discussions with investors are now focused on its next trajectory.

Considering the favorable Department of Justice ruling in the search monopoly case removed significant uncertainty, Google's consistent strong financial performance, and its leadership in AI innovation, J.P. Morgan believes Google retains numerous catalysts for a substantial stock price increase.

BMO Capital Markets believes Google Cloud Platform (GCP) remains well-positioned to gain market share, leveraging its AI product integration capabilities and growing AI-native workloads.