Google Earnings Incoming: Antitrust Risks and AI Investments in the Spotlight

Insights - On October 29, after U.S. market hours, Google’s parent company Alphabet (GOOGL) will release its Q3 2024 earnings report.

Since the last earnings release, Google’s stock has experienced significant volatility, underperforming the broader market. Investors are now eagerly awaiting this earnings report to see if it can restore confidence.

The market broadly expects Google’s Q3 revenue to reach $86.37 billion, representing a year-over-year growth of 12.6%. EPS are estimated at $1.84, reflecting an 18.7% increase from the previous year.

Source: TradingView, Google (GOOGL) 2024 Stock Performance 

Key Earnings Focus: Advertising, Cloud Growth, and AI Spending

Advertising has long been Google’s largest revenue driver. For Q3, the market anticipates Google’s advertising revenue to be $65.5 billion, reflecting a 9.8% year-over-year growth. YouTube’s ad revenue is projected to reach $8.895 billion.

Last quarter, a weaker-than-expected performance in YouTube ad revenue contributed to a slowdown in Google’s overall advertising growth. This earnings report will be closely watched for any changes in that trend.

In terms of cloud services, Q3 revenue is expected to reach $10.79 billion, reflecting a robust 28.3% year-over-year growth.

Currently, Google Cloud ranks third in the cloud computing industry. While its market share lags behind that of Amazon and Microsoft, Google Cloud’s growth rate is the fastest among the three, making it a key growth engine for Google in the future.

In addition to these two primary business segments, investors will also be paying close attention to AI-related expenditures.

Last quarter, Google’s capital expenditures surged, raising concerns about its future profitability.

If the earnings report shows AI investments driving growth in cloud and advertising, it could ease market concerns. If not, high AI spending may remain a negative factor.

Ongoing Antitrust Saga: Will Google Be Forced to Break Up?

In August, a U.S. court ruled that Google monopolized the online search market, violating U.S. antitrust laws.

On October 9, the U.S. Department of Justice (DOJ) called for Google to divest certain assets to mitigate the damage caused by its search market dominance.

If the breakup plan is implemented, it would mark the largest corporate breakup in the U.S. in over 40 years.

Most analysts believe that a breakup of Google is unlikely, and that other punitive measures may be imposed instead. However, regardless of the outcome, the decision will undoubtedly impact Google’s revenue and market share.

Evercore ISI analysts have adopted a more cautious outlook on Google’s future, forecasting “significant uncertainty” over the next 12 months.

low valuation remains an attractive factor

Despite the regulatory risks, Wedbush analyst Scott Devitt remains optimistic about Google’s stock performance following its earnings report.

"Alphabet’s valuation is currently lower than the S&P 500 and its large-cap peers, making the stock very attractive at current levels."

Devitt reiterated his "Outperform" rating on Google, with a price target of $205, implying a potential 26% upside from current levels.

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