Alphabet is anticipated to report its slowest revenue growth in four quarters on Tuesday, impacted by competition that has affected its primary Google Search operations and reduced advertising spending on YouTube.
The decline in its core business is expected to overshadow the gains driven by AI in its cloud-computing sector during the third quarter. This quarter also marks the first under the leadership of Anat Ashkenazi, who succeeded Ruth Porat as finance chief.
The long-standing supremacy of Alphabet in the digital advertising space is increasingly challenged by competitors such as Amazon and TikTok, which have gained traction among advertisers seeking access to a ready audience.
Another challenge for Alphabet comes from regulatory scrutiny, with discussions ongoing about potentially breaking up Google to address what is perceived as its "illegal monopoly" in online search.
Analysts predict that revenue from Google Search and related services will grow by 11.6% in the third quarter, a slowdown compared to the 13.8% growth seen in the second quarter, as reported by Visible Alpha.
According to MoffettNathanson analysts, "New entrants like Perplexity and ChatGPT are raising billions of dollars on the premise that search can now be disrupted; Google has been seen as slow, unprepared ... to the development of GenAI."
The analysts further noted that some of this negative sentiment may be difficult to counter in the upcoming year, anticipating significant shifts in Google's capacity to retain its dominant search position on Apple and Android devices in the United States.
In a report released earlier this month that raised concerns among investors, research firm eMarketer indicated that Google's share of U.S. search advertising revenue is projected to dip below 50% next year for the first time in nearly two decades.
Amazon's share of search advertising revenue in the U.S. is projected to reach 24% next year, as competitors like Perplexity AI, backed by Amazon founder Jeff Bezos, begin to capture some advertising dollars from Google.
In response, Google is enhancing the effectiveness of its advertising tools. The company has started incorporating ads into AI-generated summaries that appear at the top of search results, a strategy analysts believe may help mitigate competitive pressures.
Alphabet's stock experienced a nearly 9% decline in the three months leading up to September, marking its most significant quarterly drop since Q3 2022. However, the stock has appreciated by 17% year-to-date.
Analysts estimate that Alphabet's revenue for the third quarter will have risen by 12.6% to $86.31 billion, a slowdown compared to the 13.6% growth seen in the second quarter, based on estimates from LSEG.
YouTube is anticipated to have faced challenges as some advertisers redirected their budgets to ad-supported streaming services like Netflix and Amazon Prime Video. YouTube's revenue is expected to have increased by 11.5%, down from a 13% rise in the previous quarter.
Despite this slowdown, analysts at Truist predict that YouTube, particularly YouTube TV, likely benefited from increased political advertising spending during the third quarter.
On a positive note, Google Cloud is expected to report a robust growth rate of 29.2%, marking its largest increase in seven quarters, driven by rising customer investments in AI services, including the Vertex AI platform, which enables businesses to utilize Google's models and create their own custom models.
In July, Alphabet cautioned that capital expenditures would remain elevated this year as it continues to invest in AI to stay competitive.
Similarly, Google’s cloud competitors have also indicated rising capital expenditures as they strive to enhance their AI capabilities. Amazon's cloud revenue is projected to have grown by 19.3% in the September quarter, while Microsoft's cloud division is expected to see an increase of around 11%.
Investors will be attentive to the measures Chief Financial Officer Ashkenazi implements to manage other expenses effectively.
Analysts at BofA noted that her appointment presents an opportunity for the company to potentially 'surprise' stakeholders with additional self-initiated cost reduction strategies following minimal layoffs in 2024.