Alphabet Q4 earnings: anticipated growth amidst AI integration and advertising recovery

When does Alphabet report its earnings?

Alphabet Inc is set to release its fourth quarter (Q4) financial results on Wednesday, 31 January at 8am AEDT, after the market closes.

Financial expectations

For Alphabet’s upcoming results, expectations are for a broad recovery on all fronts. Double-digit growth in both its key segments (Google cloud and Google services) are expected to power a 12.1% year-on-year (YoY) growth in overall revenue to US$85.3 billion.

Likewise, its 4Q 2023 earnings per share (EPS) is expected to improve to US$1.59 from previous quarter’s US$1.55, which will extend its streak of positive YoY EPS growth to the third straight quarter.

Rebound in advertising activities to continue in 4Q 2023

Advertisement revenue accounts for 78% of Alphabet's top line. Having reverted to positive YoY growth over the past two quarters, the recovery momentum for this segment is expected to continue with a stronger 11.6% growth in Q4 2023, up from 9.5% in Q3 2023.

Increasing views of a US soft landing and further clarity on the peak in the Federal Reserve (Fed)'s hiking cycle in Q4 2023 may see business confidence return, potentially accelerating ad spending. Back in Q3 2023, Alphabet's management noted some 'stabilisation' in advertising spend, setting the tone for better times ahead.

Ongoing race to unlock synergies of generative AI on product offerings

With the ongoing traction towards generative artificial intelligence (AI), Alphabet has previously incorporated AI-powered solutions like Search and Performance Max to help customers increase their ads' return on investment (ROI). This may allow Alphabet to maintain its edge over the broader advertising industry.

Further integration of Bard with Google apps and services is also in the pipeline. However, it's a race against time against Microsoft, who has been a first mover with its ChatGPT. Microsoft's CoPilot feature, integrating AI into its office applications, poses a threat to Alphabet's cloud-based products, including Google Sheets and Google Docs. Meanwhile, further developments of Microsoft's search engine Bing could continue to vie for Google’s market share.

The race to unlock synergies of generative AI in product offerings remains tight, with any progress of new features closely monitored at the upcoming earnings call.

Cloud business performance will remain high on market participants’ radar

In the Q3 2023 results, Alphabet topped both revenue and EPS estimates, but its share price plunged as much as 10% in a single day due to a miss in its cloud revenue. This highlights the importance market participants place on this segment as Alphabet's key growth driver, amid the rising trend of generative AI, which should translate to growing demand for public cloud services.

Any lack of growth momentum could mean losing market share to Amazon Web Services (AWS) and Microsoft Azure, the other frontrunners in the highly competitive cloud computing space. A significant miss in this segment could singlehandedly drag the stock price down, given the heavy investments in its cloud unit and the high expectations for its growth.

Can YouTube continue to hold up against its competitors (eg., TikTok)?

YouTube Shorts, Alphabet's short-form video feature as a response to competitor TikTok, has been performing well. In the Q3 2023 results, it reported 70 billion daily views, a significant increase from the 50 billion daily views at the beginning of 2023.

Focus will be on whether the solid momentum in both YouTube's ads and subscription businesses from Q3 2023 can be mirrored in the upcoming results.

Technical analysis: Alphabet’s share price eyeing for a retest of its all-time high

Alphabet’s share price has been trading on a series of higher highs and higher lows since the start of 2023, fitting into a broad ascending channel pattern. Trading above its Ichimoku cloud on the daily chart, along with various moving averages (MAs) (100-day, 200-day), validates the overall upward trend.

On the weekly chart, its weekly relative strength index (RSI) has been trading above its key 50 level since March 2023, briefly retesting the key level in October 2023, which saw some defending from buyers. Buyers may aim for a potential retest of its all-time high at the US$152.00 level, with current prices standing just 3% away from the target.

On the downside, immediate support to defend may be at the US$142.50 level. A stronger area of support confluence may be found at the US$132.40 level, where the lower channel trendline coincides with the lower edge of its Ichimoku cloud on the daily chart.

Alphabet daily chart