[Earnings Preview] Google Alphabet will announce financial results this week on Wednesday, 24th! Advertising, cloud services, AI, etc. are attracting attention in the market

cloud services
Sales of Google's cloud business, which had continued to grow moderately, surged in the last quarter of 2023, and investors are paying attention to the continued growth of Google's cloud.

In the fourth quarter of 2023, sales of Google's cloud business increased 25.5% or more from the same period last year to 9.2 billion dollars, easing investors' concerns about stagnation in the same sector.

According to CFRA analysts, after the growth rate of Google's cloud business returned to 25% in the fourth quarter, it is thought that level will be maintained throughout 2024. Also, they added that since Google hasn't made efforts to reduce costs as aggressively as other big tech companies, profit margins are also key.

Bank of America analysts predicted that cloud computing sales would reach 9.3 billion 40 million dollars in the first quarter, and pointed out that strong performance in the same sector and rising quarterly profit margins could benefit the company.

Advertisement business
Google's sales for the fourth quarter of last year were 65.5 billion dollars, which was lower than analysts' expectations of 65.8 billion dollars, so investors are most interested in the advertising business, which is the company's main business. What will happen with the current financial results has become one of the highlights of this financial results season.

According to Bloomberg's consensus forecast, the Google advertising business in the first quarter is expected to reach 60.1 billion79 million dollars, up 10.32% from the same period last year, but there was an 8.15% decrease compared to the previous quarter.

As for the market, the fundamentals of the US economy are still strong, and due to the fact that the Olympics and US elections are approaching, Google advertising demand is expected to remain strong this year as well. Meanwhile, YouTube is drawing attention to its rivalry with TikTok, and the number of YouTube shorts views has reached 70 billion times a day.

TD Cowen raised the target share price for Google stock from 165 dollars to 170 dollars and maintained a “buy” rating. According to the company's research, 24Q1 search spending growth remained strong, which suggests that American consumers are resilient. Meanwhile, according to survey data, YouTube's market share is growing among younger viewers.

AI
Investors are concerned about how AI technology will affect web searches and the company's advertising revenue for Google, which is a super major company that already accounts for 90% of the global search engine market. Also, against the backdrop of recent cost reduction efforts, capital investment related to cloud and AI investments has also become an important focus.

Daniel Skelly, head of Morgan Stanley Wealth Management's market research and strategy team, is watching the revival of cloud computing and the start of an online advertising cycle that will benefit from advertising for major political events and the Olympics later this year.

Meanwhile, CFRA analysts see that Google “will increase opportunities related to AI monetization” through cloud, search, YouTube, and other businesses. Bank of America analysts have also stated that AI is a “tailwind” for Google, and although the use of AI poses long-term competitive risks for Google, there is a possibility that AI monetization will improve by 2024.

Stock price performance
According to Market Chameleon's backtest for the past 12 quarter financial days, the probability of rise and fall was balanced on the financial day of Google, and the average stock price fluctuation rate was ± 5.4%, the maximum rate of decline was -9.5%, and the maximum rate of increase was +7.7%. Last year, Google had the worst performance on 4 quarterly earnings days, of which 3 closing prices were -7.5%, -9.5%, -0.1%, and +5.8%, respectively.

Since Google has fallen into drastic oversales in the past two financial results, I think that if the current financial results disappoint again, the market will further lose confidence in Google's outlook.

Currently, Google's implied change is ± 6.0%, which suggests that the options market is betting on a daily gain/fall rate of 6.0% after performance. In contrast to this, the average stock price fluctuation rate after Google's performance for the past 4 quarters is ± 5.7%, indicating that current stock price options are overvalued.

The trend in volatility indicates that the current market is slightly bearish against this stock.

Bullish vs. Bearish
●As the number and usage of online users increases, so do digital advertising costs, and Google continues to be one of its main beneficiaries.

●Since there is a high degree of dependence on Google and search advertisements, there is almost no distribution of earnings in Alphabet.

●With Android's overwhelming global market share in smartphones, Google can continue to have an advantage in mobile searches.

●Google's dominant position in online searches is not permanent, and an increasing number of companies and regulators are challenging the methods by which the company has expanded its leadership.

●Due to the large amount of cash generated from the Google search business, Alphabet can focus on innovation and long-term growth opportunities in new fields.

●Alphabet allocates too much capital to high-risk bets where the probability of generating returns is extremely low.