Alphabet, one of the world's leading technology companies and most popular blue chip stocks to invest in, is set to announce its quarterly earnings report. As they cross swords with Microsoft in the generative artificial intelligence (AI) space, the tech behemoth has plenty of expectations to live up to as Bard needs to play catchup thanks to the first-mover advantage of ChatGPT. As investors and tech enthusiasts eagerly await this update, it's essential to understand the factors that contribute to Alphabet's financial performance and gain insights into its future prospects. In this article, we will delve into various aspects of Google's earnings, including revenue streams, market trends and key challenges.
What Is Alphabet?
Alphabet Inc. (NASDAQ: GOOGL) was created in 2015 as a diversified holding company that would oversee Google’s various subsidiaries under one umbrella. These include well-known brands like YouTube and Android to lesser-known ventures such as Waymo and Google Fiber. This corporate structure has enabled Alphabet to invest in more ambitious projects and expand into new markets.
Overview of Google
Google was founded in 1998 and has evolved into a multinational technology conglomerate, offering a wide range of products and services. It is best known for its search engine, which has become synonymous with internet search. However, Google's portfolio extends far beyond search and encompasses advertising, cloud services, hardware devices and various other ventures. Recently, Alphabet's most exciting venture includes investing in AI technology by creating Bard, its own generative AI chatbot. This has reignited interest in Google and Alphabet as the company's growth potential now goes beyond extending its lead in the ad revenue space.
When Is Alphabet Reporting Earnings?
Alphabet is reportedly releasing its earnings for the second quarter ending June 2023 on the 25th of July 2023. According to Wall Street, analysts are providing an earnings per share estimate of $1.33 for GOOGL stock alongside a forecasted revenue of US$72.8B.
Revenue Streams
Contrary to popular belief, Alphabet's revenue comes from more than just its Google Ads business. From cloud services to hardware, here's a compilation of Alphabet's revenue drivers so you better understand their business model.
Advertising
Advertising continues to be the primary source of revenue for Alphabet. In 2022, Alphabet managed to generate over US$224B in advertising revenue. This accounts for almost 80% of Alphabet's overall revenue levels. Google's search engine generates advertising revenues through Google Ads and AdSense, which utilise keyword-based ads, display ads and mobile ads to reach their target audience effectively. These advertisements are displayed on search engine result pages and websites, which generates substantial revenue for Alphabet.
Subscription Services
The company also has a range of subscription services such as YouTube Premium and Google Workspace that generate recurring revenue for Alphabet. With the YouTube Premium segment being valued at US$29B, it may be primed to grow even further now that Alphabet is considering disabling YouTube videos for users utilising ad blockers. Overall, these services offer convenience and value to users, which encourages loyalty and further strengthens Alphabet's offerings.
Cloud Services
Another significant revenue stream for Google is its cloud services. Google Cloud Platform offers scalable and reliable cloud computing solutions to individuals, businesses, and developers worldwide. The demand for cloud services has been growing rapidly as seen with competitors like Microsoft Azure and Amazon Web Services. Google Cloud Platform appears to be benefiting from the growth in cloud computing, with it finally turning profitable in Q1 2023 thanks to its US$7.4B of revenue.
Hardware
From impressing users with its AI-enabled Pixel smartphone camera to taking on Apple's Macbook dominance with the Chromebook, Alphabet's presence in the hardware space cannot be understated. Google's hardware division focuses on developing consumer devices that range from Pixel smartphones to Nest smart home products. Although hardware sales contribute a smaller portion of Google's overall revenue, they play a crucial role in expanding the company's ecosystem and strengthening its brand presence in the tech space.
Other Bets
Google's "Other Bets" segment comprises various experimental projects and ventures. These include initiatives related to autonomous vehicles (Waymo), life sciences (Verily) and smart cities (Sidewalk Labs). While these ventures may not contribute significantly to Google's revenue at present, they showcase the company's commitment to exploring groundbreaking technologies and industries.
A Rocky Start For Bard AI & Alphabet’s Growth Story
If you're wondering why GOOGL stocks plunged after the release of its AI chatbot Bard, it was due to Alphabet's blunder during its Bard advertisement. In essence, Google posted a video on Twitter demonstrating the experimental conversational AI service powered by LaMDA, which is Google's Language Model for Dialogue Applications. This model applies machine learning to chatbots and allows them to engage in "free-flowing" conversations. Unfortunately, while it was answering the query in the advertisement, the Bard artificial intelligence chatbot offered an incorrect answer, leading to speculation that Bard was inferior to its competition.
Months after this incident, it seems Alphabet has mostly cleaned up its act.
Tailwinds & Headwinds For Alphabet
Alphabet's Bull Case
Investors have been increasingly bullish about Alphabet's prospects as the company is shifting its focus towards AI-enabled technologies. Artificial intelligence has been gaining traction in various sectors and Alphabet has made significant investments to further develop this technology. With its recent AI showcase at Google I/O 2023, Alphabet managed to impress audiences with its host of new products and features. From filling in the gaps in images with Google’s Magic Editor to announcing a whole new large language model named PaLM 2 that powers Bard chat, there's no shortage of things to get excited about when it comes to Alphabet's involvement in the AI space and how it's intending to take the proverbial bull by the horns (that being Microsoft's OpenAI and ChatGPT).
Another reason why Alphabet remains such a popular stock among long-term investors is because of its seemingly impenetrable moat and revenue levels. Alphabet has Google and YouTube under its belt, both of which are the world's top two search engines. By making Google and YouTube default, must-use search engines and apps in devices, Alphabet has managed to secure its lead in terms of app popularity and ad revenue derived from these search engines. Also, instead of resting on its laurels, there's a culture of innovation and growth that drives Alphabet to achieve greater heights and this is exemplified through its attempts to diversify its revenue streams; all of which we have covered in the previous section.
Alphabet's Bear Case
Although investors may be lauding Alphabet's pivot towards AI development, its foray into this space might not be the most smooth sailing one. Microsoft is currently leading the charge in generative language modelling and AI advancements, with its OpenAI and ChatGPT project having a first-mover advantage. Thus, it might be an uphill battle for Alphabet to overtake the popularity of ChatGPT when its attempts to take over market share have been at a slower pace. This is doubly so after it was reported that ChatGPT faced waning interest in AI as the website faced a 10% fall in users worldwide. On top of this, it's worth pointing out that Google has been unable to monetise its AI advancements so far, which may be a cause of concern for investors in a tough macroeconomic environment where unnecessary spending is punished because of high interest rates.
Another factor that plays into Alphabet's bear case is the plethora of data privacy-related lawsuits that are targeted at Google over ad tech. Like all other technology companies, Alphabet faces growing scrutiny regarding user privacy and data handling practices. Heightened regulatory oversight and evolving privacy laws pose challenges to Google's advertising business, which heavily relies on user data. Adapting to changing privacy expectations while maintaining personalized advertising experiences is a significant challenge for Alphabet since they hold such a strong monopoly in the ad revenue space.
Alphabet Financial Ratios
Now that you're aware of the headwinds and tailwinds Alphabet is facing, let's delve deeper and consider the financial ratios of Alphabet to gauge its health as a company. All data is obtained from Alphabet's quarterly earnings reports.
Price-to-Earnings Ratio
We've previously covered the basics of PE ratios and how they can be used to value a stock. PE ratios are essentially calculated by dividing the current market price of a stock by its earnings per share. In GOOGL's case, at its current price of US$124.54, it has a PE ratio of 28.12. To gauge whether Alphabet's PE ratio is high or low, we'll be using the benchmark of the S&P 500, which has a PE ratio of 26.11. Under this circumstance, GOOGL stock can be seen as overvalued since it edges above its benchmark.
Free Cash Flow
Free cash flow (FCF) is a measure of how much cash a company has left over after paying its expenses and investing in new projects. Despite spending massively on growth when it comes to developing its generative AI tech, Alphabet still remains in the black when it comes to FCF, boasting an average FCF of more than US$40B over the past five years. This implies that Alphabet is more than capable of generating long-term value with its excessive amounts of cash generated from its operations.
Alphabet Technical Analysis
After an impressive reveal of AI technology at Google I/O 2023, GOOGL shares have displayed a strong area of support above the marked buy zone at the US$116 range. This can be seen as a sign of strength for GOOGL stock, as investors are buying into Alphabet's earnings expecting a bullish outlook. The near-term directional bias is to the upside given that GOOGL stock just broke out of a descending channel. With this momentum, it's looking to retest the US$129 resistance area.
Bullish GOOGL stock traders will be looking for the positive momentum from Alphabet's strong earnings report to surge past the US$129 resistance and possibly head towards the US$144 range.
On the other end of the argument, bearish GOOGL stock traders will be looking out for a weak earnings report from Alphabet, which will provide downward momentum and cause GOOGL shares to retest the US$116 demand zone.
The Bottom Line
Alphabet is one of the world’s biggest tech companies and has managed to stay relevant by adapting to emerging trends. Although Alphabet is likely to benefit from its AI investments, investors are still wary about how this technology will monetise in the long term now that the initial hype has died down. Ultimately, it’s important for investors to consider the macro and micro factors before investing in GOOGL stock. As a tech giant with diverse revenue streams, Alphabet certainly faces both opportunities and challenges in a rapidly evolving market that's excited by the increased productivity that AI can bring about. By adapting to changing trends, prioritizing user privacy, and embracing innovation, Alphabet can navigate the competitive landscape and continue its remarkable journey as a leading player in the technology industry. Only time if it's able to execute its plan on growing with AI and monetising it so it becomes another successful revenue stream for Alphabet.
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