Earnings Outlook: Alphabet earnings: What to watch for beyond Google’s AI efforts

Executives at Alphabet have sought to play up their AI efforts lately due to perceptions of a heated battle between the search giant and Microsoft Corp.
MSFT,
-1.40%,
which has invested in ChatGPT-creator OpenAI and looked to reinvigorate its Bing search engine with AI components. But while AI will likely come to play an increasing role in Alphabet’s business, there are many financial topics of interest to investors that are squarely rooted in the present.

Namely, Wall Street will be looking for signs of progress on cost cutting, the growth rate of Google’s cloud-computing business and the resilience of its advertising business in a tougher economy.

Here’s what to watch for when Alphabet posts its first-quarter financials after the closing bell:

What to expect

Earnings: Analysts surveyed by FactSet expect Alphabet to post $1.08 a share in earnings, down from $1.23 a share a year before. According to Estimize, which crowd sources projections from hedge funds, academics and others, the average estimate calls for $1.09 a share.

Revenue: The FactSet consensus calls for $68.9 billion in revenue, up from $68.0 billion a year prior. Excluding traffic-acquisition costs, analysts model $57.1 billion in revenue, up from $56.0 billion a year before. Those tracked by Estimize anticipate $57.8 billion on average.

Stock movement: Alphabet shares have declined following three of the company’s past five earnings reports, including the past two. The stock has risen 20% so far this year, as the S&P 500
SPX,
+0.09%
has added about 8%.

Of the 51 analysts tracked by FactSet who cover Alphabet’s stock, 46 have buy ratings and the other five have hold ratings, with an average price target of $123.64.

What else to watch for

RBC Capital Markets will be looking to see how advertising spending has held up in the current economic climate, and whether the recent banking collapses made marketers more cautious.

“While our end-of-quarter checks were mostly healthy, we found some commentary from our contacts in the past few weeks suggesting the late-quarter banking concerns crept into the consumer psyche and may have had a 2-3 week impact to spend which may have also had an effect on digital ad spending—although lagging somewhat,” RBC’s Brad Erickson wrote in a note to clients.

He expects such trends “have reverted somewhat or at least stabilized at this point” but said they “may have driven some modest end-of-quarter impact,” meaning that “at a minimum, we’d expect a comment from management on the conference call.”

The cloud business is also of interest given that growth there slowed in the fourth quarter. Evercore ISI’s Mark Mahaney expects further deceleration in the first quarter, modeling a 28% Google Cloud growth rate, down from 32% on a sequential basis.

“Our Cloud channel checks suggest consistent demand uncertainty against ongoing vendor optimization efforts, [though] the new expense disclosures would suggest improved profitability for Cloud,” he wrote.

Alphabet’s report will also show how cost-cutting efforts have manifested in financials. Raymond James analyst Aaron Kessler wrote that he’s “positive on increased cost discipline,” while acknowledging that “arguably investors would like to see more aggressive cuts.”

Though Alphabet’s sprawling business provides plenty of opportunity for analysis, investors should brace for another AI-heavy earnings call.

“We would expect a meaningful portion of Google’s conference call to be focused on its AI efforts including for consumers, businesses, and internal optimization efforts,” Kessler wrote.