After the market closes on February 4, Eastern Time,$Alphabet-A (GOOGL.US)$it will announce its performance for the fourth quarter of 2024.
Since last year, Alphabet-A has faced many headwinds, as the threat from generative AI model (Gen-Al) search platforms has led the market to doubt the future growth value of its search business, along with the impact of the antitrust investigation by the Justice Department of the USA and Europe, resulting in a significant underperformance in the year-on-year increase of 36% compared to the average increase of the Magnificent 7 at 63%.
However, since the beginning of the year, Alphabet-A has risen a total of 3.23%, aligning with the performance of the S&P 500 Index at 2.68%, indicating that the market has not completely abandoned Google. Looking ahead to this fourth quarter's performance, the market generally expects that Alphabet-A is likely to achieve revenue of $96.706 billion, a year-on-year increase of 12.05%; EPS is expected to be $2.12, a year-on-year increase of 29.42%.
Is the search advertising business about to undergo a transformation?
There is no doubt that Alphabet-A still dominates the Global search business. However, the market is concerned that with the rise of ChatGPT and other AI chatbots, Google may gradually lose its leading position.
According to Bloomberg's consensus expectations, total revenue from the advertising business this quarter is expected to be $71.766 billion, a year-on-year increase of about 9%. This will mark the third consecutive quarter that Alphabet-A's advertising click growth rate achieves a 3% sequential increase. Specifically, the average cost per click (CPC) for search ads is expected to increase by about 7%, continuing to decline after peaking in early 2024; however, the year-on-year growth of advertiser spending has only increased by 10%, slightly down from the previous quarter.
In the fourth quarter, Google's Performance Max advertising format continued to dominate, bringing in 67% of Google's Shopping ad revenue for retailers, with nearly 30% of the spending coming from video and other non-shopping inventory. However, spending by advertisers on Performance Max and standard shopping ad campaigns slowed to 10%. Meanwhile, competition from Temu has decreased for Google.
Market analysis suggests that chatbots may find it difficult to break Google's moat in the Search Engine business in the short term, especially considering that Google is also actively adapting to new changes. For example, Google launched a significant update called 'AI Overviews' in May 2024; similar to AI chatbots, when a question is entered in the search bar, AI Overviews can provide immediate answers.
According to market research, in a study targeting 18 million United Kingdom websites, the click-through rate of AI Overviews is currently significantly higher than that of traditional featured snippets, leading to increased traffic. Observing Google's specific financial data for the third quarter of 2024, it is evident that search revenue increased by 12% year-on-year, paid clicks grew by 4%, and cost per click rose by 8%.
Currently, Google still has the capacity and resources to adapt to changes in search behavior brought by its vast search database and deeply integrated ecosystem, but this will be a 'war of attrition'.
How does the Department of Justice swing the big stick?
Recently, the Department of Justice submitted a proposed final judgment (PFJ) against Google, suggesting seven remedial measures, including the possible divestiture of the Chrome browser and Android system, which would have a huge impact on Google's core business. However, Google has planned to appeal and has filed a counter-PFJ proposing alternative remedies.
Market analysts believe that relevant cases involving Microsoft from the 1990s to the early 21st century could serve as an ideal model for assessing Google's current situation.
As can be seen from the table below, the accusations from the U.S. Department of Justice stem from the market dominance of the two companies in certain areas, with Microsoft in Windows and Google in Search Engines. However, Google's accusations cover a broader range because it has expanded into digital advertising and has also reached exclusive agreements with phone manufacturers like Apple, making Google the default search engine.
Similar to the proposal against Google, the USA Department of Justice initially proposed to split Microsoft into two companies, one responsible for Windows and the other for Software applications. However, Microsoft overturned the order in appeals court and subsequently reached a settlement with the USA Department of Justice, focusing on remedial measures such as API (Application Programming Interface) sharing rather than structural changes, allowing Microsoft to remain a complete company to this day.
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Analysts tend to believe that Google will ultimately not have to divest its Chrome business, so the actual impact on Google should be manageable. Currently, Google has expressed its intention to appeal the ruling, and the court is expected to consider the alternative remedial measures proposed by Google.
Will Google Cloud and streaming business become the highlights? What is Wall Street's view on the Target Price?
Despite the sword of Damocles hanging over Google, it currently has a strong growth engine.
The market expects Google Cloud to continue demonstrating strong growth momentum this quarter, with Bloomberg's consensus expectation placing Google Cloud revenue at $12.155 billion in Q4, a 7% quarter-on-quarter increase and a 32% year-on-year increase.
Market analysis suggests that in the Cloud Computing sector, Google remains the third-largest service provider globally, second only to Amazon and Microsoft. Similar to Amazon Web Services and Microsoft's Azure business, Google's Cloud Computing division is also increasing capital expenditures, and there is strong market demand for AI infrastructure and generative AI solutions.
Additionally, the streaming business YouTube continues to achieve strong growth through brand and direct response advertising, while the monetization rate of the Short Video platform Shorts continues to develop and compete with TikTok and Reels. According to data disclosed by Google, in 2024, YouTube's advertising revenue and subscription revenue have officially surpassed $50 billion, setting a new historical record.
Meanwhile, the market will also focus on the latest news regarding Google's Quantum Computing chip Willow, announced at the end of last year, which may determine the price ceiling of recently surging Quantum Computing concept stocks.
According to official information from Alphabet, Willow achieved amazing results in the benchmark test: it completed a standard calculation in less than 5 minutes, a task that top supercomputers would take over 10^25 years to accomplish—longer than the age of the universe!
Finally, according to Futubull data, as of January 30, a total of 28 Analysts have rated Alphabet, with 78.57% of analysts stating 'Buy'. For the Target Price forecast, the highest price is $240, and the average price is $219.33.
How did the stock price perform on earnings report days?
According to Market Chameleon, backtest of the past 12 quarters' performance days shows that Alphabet's stock price fluctuated on average by ±6.0% on earnings release days, with the maximum increase being +10.2%.
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From the Options volatility skew perspective, market sentiment is slightly bearish toward the future performance of Alphabet.
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