GOOGL stock's Q2 earnings report looms as analysts provide mixed ratings

Shares of Alphabet have seen a 35% YTD increase, surpassing the S&P 500 index's 18% rise. The stock has risen approximately 22% over the past six months, driven by optimism that the digital advertising slowdown may be over.

The Alphabet is poised to have a forward multiple of 22, making it cheaper than Apple (32), Microsoft (35), and Amazon (82). The expected earnings growth rate over the next five years is nearly 16%, giving the stock a PEG of 1.40, higher than what Peter Lynch would prefer but lower than the high PEGs of Apple (>4) and Microsoft (>3).

Despite being the worst-performing mega-cap tech stock this year at 36%, Alphabet's relative undervaluation and underperformance may set the stock up for a rally post-earnings if there are positive surprises on Q2 results or Q3 guidance.

According to SeekingAlpha, the Alphabet will continue to gain traction in the cloud market, with a projected annual revenue growth of 20% through 2027. The company's other revenue segments, including non-ad YouTube revenue, Google Play Store, and sales of hardware products, are also expected to see significant growth.

In particular, due to strong growth in YouTube Premium, Music, and TV subscriptions, Alphabet's other revenue is projected to increase by 13% in 2023 and 20% in 2024.

Analysts have given the stock a 4-star rating, with a long-term fair value estimate of $154 per share, equivalent to a 2023 enterprise value/EBITDA ratio of 17.

Despite being heavily reliant on advertising revenue, Alphabet has been diversifying its revenue streams with initiatives such as productivity tools and Cloud. However, advertising still accounts for around 79% of the company's total revenue, which is why investors panicked when Microsoft made an aggressive move toward AI.

Advertising revenue growth had fallen from 22% to 15% to 9% in the prior three years before the COVID-induced jump in 2021. While 2022 showed a spike in ad revenue growth, Q1 2023 revealed that Alphabet's advertising business is facing pressure.

Analysts predict that advertising will account for around $57 billion (a hair below 80%) of the company's total revenue of around $72.8 billion. In addition, the slowdown in advertising has not been as severe as expected, with U.S. digital advertising spending projected to rise 8% YoY from $244.78 billion in 2022 to $263.89 billion in 2023, according to Insider Intelligence.

The Zacks Consensus Estimate for Google Advertising is expected to grow 1.3% YoY to $57 billion.

Google Cloud Platform and Google Workspace have been continuously gaining momentum in the booming cloud computing market due to the company's investments in infrastructure, security, data management, analytics, and AI.

While Amazon Web Services and Microsoft Azure remain the top two cloud providers with 30% and 20% market shares, respectively, Google Cloud is gaining ground with a 9% share. In Q2 2023, analysts predict that Google Cloud's revenues will reach $7.72 billion, indicating YoY growth of 22.9%. Moreover, Alphabet's cloud revenue is growing even faster than the projected global rate of 16.3% over the next four years.

The Google Cloud segment, which derives revenues from fees collected for Google Cloud Platform services and Google Workspace collaboration tools, has been driving substantial revenue growth for Alphabet. In Q1 2023, revenues from this segment were $7.45 billion, accounting for 10.7% of total revenues and exhibiting YoY growth of 28%.

Apart from cloud computing, Alphabet's strengthened healthcare technology portfolio is expected to drive growth in its Other Bets segment in Q2 2023. Analysts estimate that revenues for this segment will reach $251 million, reflecting YoY growth of 30%.

Google's deepening focus on generative AI is expected to have a positive impact on the company's Q2 results. The launch of consulting services, including advice and tools to aid clients in adopting generative AI techniques, is likely to contribute to strong growth. Additionally, the growing momentum with PaLM Generative AI models and Vertex AI platform, along with solid adoption of generative AI-powered Workspace tools like Smart Canvas and Translation Hub, are expected to be positives for the company.

Google Cloud's efforts to identify cyber threats and automate security workflows and responses on the back of generative AI are also likely to be reflected in the upcoming earnings report. Moreover, investors are looking for details about how the company plans to monetize its ChatGPT rival Bard, which has received positive reviews.

As Seeking Alpha reported recently, the AI race is in full swing at Alphabet with the company showing some urgency to address the threat to its search business from competitors like Microsoft and AI in general. The integration of generative AI technology into Google's search engine is expected to drive search momentum in Q2, with large language models-powered enhanced search results, language models like BERT and MUM, coupled with multi-search and visual exploration features, improving search results.

GOOGL stock received mixed ratings from equity researchers in the lead-up to its Q2 earnings report.

Analysts at UBS downgraded the stock, citing concerns around the company's transition to internet search using generative artificial intelligence that they believe will slow advertising revenue growth.

Similarly, Bernstein Research downgraded the stock, warning that Google's aggressive push to integrate generative AI into core search results could create a near-term air pocket on search ad pricing.

BofA raised the firm's price target on Alphabet to $142 from $128 and maintained a Buy rating on the shares ahead of the Q2 report due on July 25. BofA forecasts revenue and GAAP EPS at $60.7 billion and $1.42, respectively. The firm is optimistic about stable search share trends that it believes will enable Google to control the pace of large language model integration.

Credit Suisse also raised its price target on Alphabet to $150 from $135 and maintains an Outperform rating on the shares ahead of the report. Credit Suisse's checks suggest an acceleration of year-over-year Search budget growth for Q2, as would be expected given easing comparisons. Additionally, Credit Suisse highlights improving advertiser feedback quarter-over-quarter of increasing ad budgets for YouTube, which is recovering coinciding with what looks to be increasing ad loads.

Goldman Sachs analyst Eric Sheridan raised the firm's price target on Alphabet to $140 from $132 and maintains a Buy rating on the shares. Goldman Sachs has raised its Google Services EBIT estimates to better reflect durable cost savings and leverage as revenue growth recovers. The firm now models about 100 basis points of year-over-year Google Services OI margin expansion in 2024.