Google parent Alphabet to report Q2 earnings Tuesday with AI, ad spending in spotlight

Google parent Alphabet (GOOG, GOOGL) will report its fiscal second-quarter earnings after the bell on Tuesday, giving Wall Street a closer look at the state of the digital advertising market and whether the AI ​​hype generativity is translating into revenue growth. The tech giant is coming off an impressive first quarter, during which it announced it initiated its first dividend of $0.20 per share and authorized $70 billion in share repurchases.

Alphabet shares are up 30% year to date. Shares of rivals Microsoft (MSFT) and Amazon (AMZN) are up 18% and 22% year to date, respectively. All three companies are investing money in building their generative AI capabilities, spending lavishly on data centers capable of powering the AI ​​models they offer through their cloud services platforms.

For the quarter, analysts forecast earnings per share of $1.85 on revenue of $84.35 billion, according to data compiled by Bloomberg. That would be a big jump from the same period last year, when the company reported earnings per share of $1.44 on revenue of $74.6 billion.

Wall Street expects advertising revenue to exceed $64.5 billion, up from $58.1 billion last year. This includes year-over-year increases in Google Search and other YouTube advertising and Google Network revenue, pointing to a positive advertising environment. An Alphabet defeat could also boost shares of rival ad business Meta (META).

In an investor note, Jefferies analyst Brent Thill said he expects advertising spending to be similar to or better than in the first quarter, with Google’s paid search growth in the mid-teens.

“Fundamentals remain healthy, with solid advertising spending, potential benefits from the Olympics and elections,” Thill wrote.

Wedbush analyst Scott Devitt struck a similarly optimistic tone in his investor note. “We believe the setup remains positive heading into 2Q results, with our ad research and agency commentary pointing to continued strength in Google Search,” he wrote.

On the cloud front, Wall Street forecasts Google Cloud revenue of $10.1 billion and operating profit of $982.2 million. This would represent an increase from the $8 billion in revenue and $395 million in operating profit the company reported in the second quarter of 2023.

Google still trails Amazon and Microsoft in the cloud space, with its rivals taking first and second place respectively. However, the segment continues to grow and Alphabet is banking on its investments in generative AI to help drive stronger revenue and customer acquisition in the future.

But when exactly AI starts generating revenue for Google’s cloud business, let alone its advertising segment, is still up in the air.

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“It is still too early to count on the benefits of AI, as most [companies] remain in pilot mode and the material AI [revenue] it is more likely a 2025-26 event,” wrote Thill.

As for Google’s search business, Devitt says AI search overviews can create “incremental engagement and could become a tailwind for search monetization over time.”

Google is still trying to gain a foothold with AI Overview, the generative AI feature that appears at the top of Google Search results pages. In May, the company launched the search function, only for users to quickly discover that their answers weren’t always accurate, with now-famous answers telling users to put cola on their pizza or eat a rock every day. Google responded by withdrawing some of the AI ​​generation features.

While generative AI is certainly a hot topic this earnings season, it’s still unclear to what extent it will boost companies’ bottom lines. But with Google being the first among the big tech companies to report profits, that should give us some indication as to whether the technology is generating significant revenue or not.

Email Daniel Howley at dhowley@yahoofinance.com. Follow him on X at @DanielHowley.

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