According to intelligence from WiseNews, Alphabet (GOOGL.US) is to release its Q2 financial report post-market trading on Wednesday morning Beijing time, with investors keeping a close eye on continuous growth in its cloud business and the latest developments of its artificial intelligence (AI) projects. Analysts expect the Q2 revenue of the company to reach 84.3 billion US dollars, up 13% year-on-year, and the net income to reach 23 billion US dollars, or 1.85 US dollars per share, up 25% year-on-year, according to Visible Alpha.

Search and advertising are the core businesses.

Investors are most concerned about whether the demand for digital advertising will remain stable.

After a slowdown or decline for 18 months, the cost per click of the search business increased by 8% in Q1. Some are worried that the demand for American advertisements from Asian retailers (such as Timo) will weaken and pull down prices. If search clicks are weak, it may lead people to perceive that Google's dominant position is being weakened by new AI tools from OpenAI/Microsoft and other companies.

Google, owned by Alphabet, continues to innovate AI technology to boost its search business and is expected to push traffic to its platform in the upcoming quarter. The search business accounts for a large part of its total revenue.

Integrating generative AI technology into the search engine is expected to continue to benefit Google's search progress. With the large language model (LLM), Alphabet is likely to promote its search momentum in Q2. LLM, together with other search and visual exploration functions, is expected to further improve search results. The Search Generation Experience (SGE) utilizes generative AI technology to make search results more natural and intuitive, which may have made a good contribution to revenue.

SGE is expected to help the advertising business create relevant, customized, and high-quality advertisements. Google Ads and Performance Max's advantages in conversational experience may drive the company's growth among advertising customers in Q2. It is expected that the improvement of YouTube advertisements will also be a positive factor.

Its advantages in mobile search (based on mobile device-friendly algorithms, powerful product listings, and flight search functions) are a plus. It is likely to have increased the search traffic of the Chrome browser in Q2. According to Zacks data, analysts' general expectation for total Google search and other revenue is US$47.46 billion, up 11.3% year-on-year.

In the advertising business, Alphabet is increasingly striving to provide advertisers with better performance and profitability support based on basic research models and LLMs, which is expected to make a significant contribution. The market's general expectation for Google's total advertising revenue is 64.28 billion US dollars, up 10.5% from the same period last year.

Regarding non-advertising revenue from YouTube, the increasing user momentum of YouTube Shorts may be a favorable factor. Google's efforts to strengthen relationships with content creators may have had a positive effect. The growth momentum of Android and Pixel devices is expected to benefit Alphabet's performance in the upcoming quarter.

It is expected that the above factors will benefit Google's service department's performance in Q2. The Zacks' general expectation for Google's service revenue is US$73.43 billion, up 10.8% year-on-year.

Key indicator: Cloud growth.

People are increasingly worried that investments in data centers and computing capabilities by Alphabet, Meta Platforms (META.US), Amazon (AMZN.US), and Microsoft (MSFT.US) will not bring substantial financial returns. Investors may focus on the continuous growth of Google's cloud business because the revenue of the cloud department may help alleviate investors' concerns about large technology companies increasing investment in AI. Analysts predict that the revenue of the cloud computing business will reach 10.22 billion US dollars, up from the previous quarter and the same period last year, according to Visible Alpha.

Alphabet's cloud products include Google Cloud Platform and Google Workspace, which continue to gain momentum in the booming cloud computing market. The company's increasing investments in infrastructure, security, data management, analysis, and generative AI are the primary positive factors.

The expanding Google Cloud customer base is expected to drive revenue growth for Alphabet in Q2 2024. The revenue of Google Cloud department comes from fees charged for Google Cloud Platform services and Google Workspace collaboration tools and has been driving significant revenue growth for Alphabet. In Q1 2024, Google Cloud revenue grew by 28.4% year-on-year to 9.6 billion US dollars, accounting for 11.9% of the total revenue of that quarter.

Business focus: The impact of AI.

Alphabet's efforts to integrate data lakes, data warehouses, data governance, and advanced machine learning into one platform are expected to boost its prospects in the cloud market in the upcoming quarter. Its powerful cloud service portfolio, expanding data center network, availability zones, and regions have contributed greatly to Google Cloud's revenue. Strong real-time data, analytics and AI, as well as its open and scalable cloud infrastructure, are expected to help win customers in the upcoming quarter.

Alphabet has been increasing its investment in cloud customer business, including providing customers with more generative AI tools. Although Google still lags behind Microsoft and Amazon in the cloud computing market, the company reported that its cloud computing division has been profitable for several quarters after years of losses.

Investors will be watching the latest developments for Alphabet's AI assistants, Gemini Live and Project Astra, which could help it compete with OpenAI supported by Microsoft. Alphabet may also reveal how an overview of AI affects Google searches. Gemini's robust momentum is expected to benefit Google Cloud's second quarter performance. The company has launched the enterprise-focused AI code completion and assist tool - Gemini code Assist - which could push its development trajectory in various enterprises.

Another notable factor is the latest update of the Gemma family's open-source AI language model, including the introduction of Gemma 2 - a next-generation model with 27 billion parameters - and PaliGemma - the first visual language model for image captions, labels, and question-answering use cases. The introduction of these products is expected to benefit revenue in this quarter.

The widespread adoption of generative AI workspace tools could be another positive factor. In Q2 of this year, Workday expanded its partnership with Google Cloud. Workday is leveraging the latter's Gemini model and Vertex AI to help quickly generate AI-driven code, troubleshoot and retrieve information. Cintas also partnered with Google Cloud to develop a generative AI knowledge center to accelerate its digital transformation. Cintas is using Google Cloud's Vertex AI to build its generative AI-supported search engine to enhance employee capabilities.

Details of the Wiz acquisition.

Google Cloud's strong ability to identify network threats and automate security workflows and responses under generative AI support may be reflected in the upcoming performance. Therefore, Google may also offer major network security acquisition deals that have recently received market attention.

Previously, Wise reported that the company was in talks to acquire cybersecurity startup Wiz for about $23 billion. If successful, this would be the largest acquisition ever by this technology giant. Acquiring cloud computing and cybersecurity company Wiz may help Google catch up with Microsoft and Amazon in the increasingly competitive cloud market.

Previously, Alphabet shelved its efforts to acquire customer relationship management company HubSpot (HUBS.US). Like the HubSpot deal, considering the strict scrutiny of antitrust regulators faced by Alphabet, large-scale potential acquisitions like Wiz are not common for large tech companies like Alphabet. Google faces several antitrust challenges, including a US Justice Department lawsuit alleging the abuse of its dominant position in online search and another lawsuit against its digital advertising tools.

Valuation levels

According to Morningstar data, analysts forecast a fair value of $171 per share for the company, equivalent to an enterprise value-to-EBITDA multiple of 15 in 2024. Given the company's continued investment in growth plans (primarily in AI) requiring higher R&D levels, analysts expect slight pressure on profit margins in 2024, but expect profit margins in 2025-2028 to improve, thanks to faster growth in generative AI search monetization and cloud computing, which can be attributed to the widespread adoption of generative AI. Morningstar's model assumes a five-year total revenue compound annual growth rate of over 10% and a five-year average operating profit margin of nearly 29%.

Analysts expect advertising revenue to still account for over 70% of Alphabet's total revenue, despite much slower growth rates than historic levels, driven by continued growth in digital advertising spending. Analysts expect advertising revenue to grow 6.5% in 2024, as global economic growth is expected to be lower than in 2023. Analysts estimate Google's total advertising revenue to be $253 billion in 2024 and $272 billion in 2025; by 2024, YouTube is expected to contribute 13.6% of Google's advertising revenue, slightly up from 2023 and exceed 14% by 2025. YouTube's growth should benefit from its impressive coverage and usage frequency, plus its video content format, which is attractive to brand advertisers.

Since the beginning of this year, Alphabet's stock price has risen nearly 30%, and as of Friday's close, Alphabet's stock price was $177.66.