Generative AI Shakes Up Search Business: A Closer Look at Tech Giant’s Strategy
As Alphabet (GOOGL) gears up to report its second-quarter earnings on July 23, anticipation is running high. Investors are eagerly awaiting insights on the rollout of “AI Overviews”—Google’s groundbreaking generative artificial intelligence search product. This innovation has ignited significant excitement, propelling Google stock up by an impressive 35% in 2024, echoing the broader market’s feverish enthusiasm for generative AI.
On July 9, Google stock hit a new intraday high of $191.36, though it closed slightly lower, hinting at underlying volatility. The forthcoming Q2 financial results are poised to not only test Google’s market valuation but also to solidify its status among the elite technology stocks known as the Magnificent Seven.
Evaluating Google’s Investment Potential
Google’s meteoric rise this year makes it a tantalizing prospect for investors. Alphabet ranks No. 20 on a list of growth companies and is prominently featured on lists highlighting large-cap stocks and noteworthy investments. Out of 19 analysts polled by Visible Alpha, a staggering 16 rate Google stock as a buy heading into the Q2 earnings report, with only three maintaining a hold rating.
AI Overviews: A Revolutionary Innovation
Google’s bold integration of generative AI into its core search advertising business marks a seismic shift in search technology. The Gemini AI model tools and chatbot AI technology embedded into Google’s search engine are nothing short of revolutionary. Launched widely in the U.S. in mid-May, AI Overviews provide conversational summaries at the top of search queries. Google plans to expand this groundbreaking feature globally to 1 billion users by year-end.
Analysts are largely optimistic about the positive impact of AI Overviews on search ad revenue. Bank of America analyst Justin Post highlights that Statcounter data indicates Google gained market share both globally and in the U.S. in June, suggesting AI Overviews are driving query growth. Post believes that broader rollout and deeper Gemini integration will drive higher usage and enhance monetization across Google’s ecosystem.
Anticipating Stellar Q2 Earnings
For Q2, analysts predict a 27% growth in earnings per share (EPS) to $1.83, with revenue climbing 13% to $84.1 billion. Investors are also laser-focused on operating expenses and profit margins as capital spending rises. Google’s strategic financial management, exemplified by its recent appointment of Anat Ashkenazi as CFO, bodes well for future growth. Ashkenazi’s extensive experience at pharmaceutical giant Eli Lilly (LLY) is expected to provide valuable insights during Google’s Q3 earnings call.
In Q1, Google shattered consensus estimates for earnings and revenue, introduced its first-ever dividend, and announced a $70 billion stock buyback. Despite a 91% increase in capital spending amid AI investments, Google expects operating margins to expand in 2024 by moderating expense growth and targeting efficiency gains. Bank of America forecasts Google’s free cash flow will surge to $118 billion in 2026, up from $69 billion in 2023, highlighting the company’s robust financial health.
Alphabet’s Competitive Edge
Amid the explosive rise of generative AI, Google continues to cement its position as a tech industry titan. The integration of its Gemini AI model tools into the search engine and the availability of generative AI tools to software developers showcase Google’s relentless innovation. At Google Marketing Live 2024, the company unveiled new products and features for advertisers, including ad placement across the new AI Overviews format, further solidifying its market dominance.
DOJ Antitrust Case and Strategic Challenges
A ruling in the Justice Department’s antitrust trial against Google looms on the horizon. The government alleges that Google maintains an internet search monopoly through exclusionary agreements. A potential loss could lead to significant operational changes or even a breakup. However, Google’s substantial cash reserves and strategic management enable it to navigate such challenges with aplomb. The company’s Performance Max advertising platform, which automates buying across various Google services, is providing a significant boost to its stock. Performance Max allows advertisers to manage campaigns across all Google ad inventory, reportedly converting more shoppers into buyers.
Growth Beyond Search
Wall Street analysts view growth in YouTube and cloud computing as key factors for Google’s continued success. The company’s hardware business, competition with Apple in smartphones, and efforts to counter TikTok with YouTube Shorts are critical areas to watch. YouTube Shorts generates approximately 70 billion daily views, underscoring its explosive growth.
In cloud computing, Google is the third-largest service provider behind Amazon and Microsoft. Google’s cloud unit has increased capital spending to target generative AI opportunities, further strengthening its market position. The 2022 acquisition of cybersecurity firm Mandiant for $5.4 billion appears to be yielding substantial benefits for Google’s cloud-based cybersecurity services.
Alphabet’s Strategic Vision
Investors are also keenly watching Alphabet’s “Other Bets” and Moonshots, such as Waymo’s robo-taxi services, for new developments. While Waymo’s rollout has been slower than expected, it remains a leader in autonomous vehicles, showcasing Alphabet’s commitment to groundbreaking innovation and long-term growth.
Conclusion: A Compelling Buy
Alphabet has demonstrated remarkable resilience and growth, with shares jumping 65% in 2021 and advancing 58% in 2023 despite increased competition in AI and internet search. Google’s stock currently boasts a Relative Strength Rating of 93 out of a possible 99 and an Accumulation/Distribution Rating of B-minus, indicating strong institutional ownership.
The upcoming Q2 earnings report is set to reinforce Google’s formidable market position and innovative edge. With its strategic investments in AI, robust financial health, and relentless innovation, Google remains a compelling buy for investors looking to capitalize on the ongoing technological revolution.
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