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Google parent Alphabet (GOOG, GOOGL) will report its fiscal second quarter earnings after the bell on Tuesday, giving Wall Street a closer look at the state of the digital advertising market and whether generative AI hype is translating to revenue growth. The tech giant is coming off of an impressive first quarter during which it announced it initiated its first dividend of $0.20 per share and authorized stock repurchases of $70 billion.
Alphabet shares are up 30% year to date. Shares of rivals Microsoft (MSFT) and Amazon (AMZN) are up 18% and 22% year to date, respectively. All three companies are pouring money into building out their generative AI capabilities, spending lavishly on data centers capable of powering the AI models they offer via their cloud service platforms.
For the quarter, analysts are anticipating earnings per share of $1.85 on revenue of $84.35 billion, according to data compiled by Bloomberg. That would be a major jump from the same period last year when the company reported earnings per share of $1.44 on revenue of $74.6 billion.
Wall Street expects advertising revenue to top $64.5 billion, up from $58.1 billion last year. That includes year-over-year increases in Google Search & other, YouTube ads, and Google Network revenue, pointing to a positive advertising environment. A beat by Alphabet could also buoy shares of ad business rival Meta (META).
In an investor note, Jefferies analyst Brent Thill said he expects advertising spending to be similar to or better than Q1, with Google paid search growth in the mid-teens.
“Fundamentals remain healthy, with solid ad spend, potential benefits from Olympics and elections,” Thill wrote.
Wedbush analyst Scott Devitt struck a similarly upbeat tone in his investor note. “We think the setup remains positive heading into 2Q results with our ad survey and agency commentary pointing to continued strength for Google Search,” he wrote.
On the cloud front, Wall Street is anticipating Google Cloud revenue of $10.1 billion and operating income of $982.2 million. That would mark an increase from the $8 billion in revenue and $395 million in operating income the company reported in Q2 2023.
Google still trails both Amazon and Microsoft in the cloud space, with its rivals capturing the number one and two spots, respectively. However, the segment continues to grow, and Alphabet is banking on its investments in generative AI to help power stronger revenue and customer acquisition in the future.
But when exactly AI starts to generate revenue for Google’s Cloud business, let alone its ad segment, is still up in the air.
“It is still too early to count on AI benefits as most [companies] remain in pilot mode, and material AI [revenue] is more likely a 2025-26 event,” Thill wrote.
As for Google’s search business, Devitt says AI search overviews could create “incremental engagement and may become a tailwind for Search monetization over time.”
Google is still trying to find its footing with AI Overview, the generative AI feature that shows up at the top of Google Search results pages. In May, the company rolled out the search function, only for users to quickly discover that its answers weren’t always accurate, with now famous responses telling users to put glue in their pizza or to eat a rock every day. Google responded by pulling back some of the gen AI features.
While generative AI is sure to be a major theme this earnings season, it’s still unclear how much it will boost companies’ bottom lines. But with Google the first among Big Tech companies to report earnings, it should give us some indication of whether the technology is generating meaningful revenue or not.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on X at @DanielHowley.
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