By It’s remarkable to see how much can change in just three months. Alphabet, the parent company of Google, recently released its earnings report, revealing impressive growth in both YouTube and search-advertising revenue, despite a challenging advertising climate. This has reminded Wall Street that Alphabet has been actively involved in the AI game for a significant period, and the technology is already making a meaningful impact on their business.
As a result, Alphabet shares saw a 7.0% increase in Wednesday morning trading, putting them on track for their highest close since April 8, 2022, when they finished at $133.29.
Alphabet’s Longstanding Embrace of AI
Jefferies analyst Brent Thill emphasized in his note to clients that Alphabet has been an “AI-first” company for seven years now. He titled his note, “Don’t Call It an AI Comeback,” underscoring the fact that this is not a new development.
Thill acknowledged that most checks pointed to a beat in Alphabet’s earnings report, and the company did not disappoint. They exceeded revenue expectations by approximately $2 billion, causing some investors with short positions and concerns about generative AI to take notice. According to Thill, this strong performance demonstrated Alphabet’s “AI prowess in ads,” as they continue to gain the trust of advertisers and generate better returns on ad spending. Additionally, the company showed encouraging momentum in the cloud sector, with revenues offsetting cost optimizations.
Thill gave Alphabet’s stock a buy rating and raised the price target from $150 to $165.
Early Integration of AI by Alphabet
Michael Nathanson, an analyst at SVB MoffettNathanson, also noted that while generative AI has been a popular buzzword in 2023, Alphabet began incorporating machine learning and artificial intelligence into its products and ad solutions nearly a decade ago. This puts them ahead of the curve in the AI space.
Overall, Alphabet’s latest earnings report highlights the positive impact that generative AI is starting to have, especially evident in their robust cloud performance. The company’s dedication and early adoption of AI technologies position them well for continued success.
Alphabet’s AI Ambitions and Potential Growth
Alphabet, the parent company of Google, has invested a significant amount in research and development over the past five years, totaling $140 billion. In addition, they have spent $125 billion on capital expenditures during this time. Given these substantial investments, it is clear that Alphabet is well-prepared to thrive in a world driven by generative artificial intelligence (AI).
With AI technology being infused into Google products for many years now, the focus has shifted to the upper bounds of near-term margin growth. Analysts, such as Nathanson, believe that Alphabet may be at the beginning of a similar growth trajectory as Meta.
Nathanson rates Alphabet’s stock as outperform and sets a target price of $145.
Mark Shmulik from Bernstein highlights Alphabet’s messaging about its AI positioning, particularly in relation to their cloud business. He finds that the company’s commentary on AI demonstrates progress with account wins and explains why their revenue growth remained strong at 28% year-over-year, despite ongoing client optimization efforts.
However, Shmulik questions whether Alphabet is being too aggressive in some areas. He notes that Microsoft’s Bing lags behind Google search in terms of ad growth rates. This raises concerns about Alphabet’s swift movements with Bard and SGE (Search Generative Experience), a version of Google Search that emphasizes AI-driven responses.
While this approach may prove optimal in the long run, Shmulik expects increased expenses and capital expenditures to support Alphabet’s AI ambitions. He maintains a market-perform rating but raises his price target to $135 from $130.
In conclusion, Alphabet’s commitment to AI and its potential for growth have become increasingly evident. Despite some concerns about aggressiveness and expenses, the company’s strategic investments and progress in various areas position them well for the future.
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