Google Pre-Earnings Analysis
Google’s parent company, Alphabet, has recovered 38% since the market wide sell-off earlier this year in April. However, the rally faces a major test today as the company releases its quarterly earnings report.
Over the past 12 months, Google has faced growing pressure from new rivals like ChatGPT and other AI chatbots. Investors feared that the search engine’s dominance might be coming to an end as newer, more innovative technologies emerged. Google responded by enhancing its own AI model, Gemini. Both chatbots are powerful, with their own specialties, but the rapidly evolving space is pushing everyone to continuously improve. Google holds an advantage with $75 billion in free cash flow, giving it the flexibility to acquire smaller competitors and increase R&D spending.
The biggest threat to Google right now is a series of U.S. antitrust cases targeting its dominance in search and ad tech. These lawsuits could lead to structural changes and come alongside large settlements raising concerns about the company’s data practices. On top of that, pressure from EU and UK regulators adds further risk. Combined, these legal challenges threaten Alphabet’s ad revenue, platform control, and growth in AI. Google is actively fighting back and working to resolve these issues, but only time will tell how the rulings play out. Many companies have faced U.S. antitrust scrutiny and made adjustments, but the odds of drastic outcomes remain low. Even in the event of a split, it would not necessarily be a negative for shareholders.
Last quarter, the company generated $90 billion in revenue, with $34 billion in net income, highlighting its strong profit margins. Revenue this quarter is expected to reach $94 billion, which may help ease investor concerns over competition and regulatory pressure. In fact, recent buying activity into earnings suggests that many investors have already started looking past the risks.
One final note: Google’s position as the default search engine on Apple devices is absolutely critical to its continued dominance. It pays Apple $20 billion a year to secure that spot. However, Apple has floated the idea of acquiring Perplexity, a rising AI-powered search tool. If Apple were to replace Google with Perplexity, it could significantly hurt Google’s search revenue. While other segments like Cloud and YouTube would still contribute, Google’s core business is built on search. Investors should closely watch any developments around Apple’s search engine decisions.
If we strip away the external threats and focus on the fundamentals, Google remains a behemoth, arguably one of the best companies to invest in today. There is a strong chance the current challenges will pass, allowing Google to maintain its leadership in online services and emerging technologies. Trading at only 21 times earnings, it is also one of the cheapest among the Magnificent 7, backed by outstanding business management and consistent execution.