What to Expect from Alphabet’s Q1 2023 Earnings Amid the AI Euphoria

The earnings season gets into full swing this week and tech giants like Alphabet and Microsoft would release their earnings. Here’s what markets are expecting from Alphabet’s Q1 earnings amid the AI euphoria.

Analysts polled by TIKR expect Alphabet to post revenues of $68.79 billion in the first quarter which would mean a YoY rise of a mere 1.2% and in line with the 1% growth in the previous quarter.

Incidentally, its Q4 2022 revenue growth was the slowest since Q2 2020 when the global economy went into a tailspin due to the COVID-19 lockdowns.

Its revenues still rose 10% YoY last year which was the highest among FAANG peers. The stock still dropped 39% last year even as it was the second-best performing FAANG stock of the year.

What do analysts expect from Alphabet’s Q1 2023 earnings?

Analysts expect Alphabet to post an adjusted EPS of $1.05 in the quarter – a YoY fall of 31%. Consensus estimates call for a 6.2% fall in S&P 500 earnings this quarter. If that were to happen, it would make it the worst quarter since the second quarter of 2020.

Meanwhile, corporate earnings are expected to rebound in the second half of 2023 partially because of the base year effect.

What to watch in Alphabet’s Q1 2023 earnings?

Alphabet’s advertising revenues would be in focus during the first quarter earnings release as the metric fell YoY in the previous quarter. Analysts would also look at the trajectory of YouTube revenues as that business has now disappointed for three straight quarters.

Cloud is still a bright spot for Alphabet though and in the fourth quarter, the business reported revenues of $7.32 billion – a YoY rise of 32%. Notably, Amazon’s cloud business is witnessing a severe slowdown and the growth rates were the lowest ever in Q4.

The company continues to face headwinds in its AWS business and during the Q4 2023 earnings call it said that so far in 2023, AWS revenues are up in the low teens as compared to the last year.

Google’s search dominance is under threat

For years, Google has dominated the online ad market but the dominance is under threat. There are reports that suggest that Samsung is planning to switch its default search engine from Google to Bing.

The company might comment on the reports during the upcoming earnings call. Barclays estimates that Samsung accounts for around $20 billion of Alphabet’s gross revenues and $7.3 billion of its operating income.

Alphabet might not lose all of its revenues even if Samsung were to make the switch as consumers can always shift back to Google. However, it is still a potent risk.

AI could be the focus as GOOG reports its earnings

Meanwhile, AI could be another focus of Alphabet’s Q1 2023 earnings call. In February, Google revealed its Bard chatbot.

In Bard’s promotional video, in response to the question, “What new discoveries from the James Webb space telescope (JWST) can I tell my nine-year old about,” the AI-powered chatbot suggested that JSWT took the first pictures of a planet outside Earth’s solar system.

The answer is factually wrong and was immediately picked by many experts and media houses including Reuters. Grant Tremblay, an astrophysicist at the US Center for Astrophysics tweeted, “Not to be a ~well, actually~ jerk, and I’m sure Bard will be impressive, but for the record: JWST did not take ‘the very first image of a planet outside our solar system’”

After Bard’s botched debut, Alphabet stock lost around $100 billion in its market value.

Can Alphabet’s Bard take on ChatGPT?

Alphabet admittedly lost round one to ChatGPT. Meanwhile, analysts are not giving up on Bard despite the disappointing debut.

Evercore ISI’s Mark Mahaney, who has an outperform rating and $125 target price on GOOG stock said, “We believe the market may under-appreciate the strength of Google’s existing LLMs (large language models) like Bard (which we have tested over the past few weeks), and our working assumption is that Google will successfully rebuild its Search engine to include LLM responses when appropriate, maintaining both its Search market share and its very profitable unit economics.”

AI is the new battlefield between tech giants as companies pour billions into the business even as they cut back on spending elsewhere.

GOOG is on a cost-cutting spree

Like fellow tech giants, GOOG is also on a cost-cutting spree and announced 12,000 layoffs earlier this year. It is taking several measures to lower costs and has also reportedly paused the construction at its upcoming campus in San Jose.

The company might provide more insights into its cost-cut initiatives during the upcoming earnings call.

All said, markets are now bracing for a flurry of earnings this week as 30% of S&P 500 constituents – ranging from tech, industrials, energy, consumer staples, and healthcare companies report their earnings.

In the absence of major economic indicators, earnings might drive the markets next week.