Google’s Q2 Earnings Preview: AI Growth and Revenue Expectations
Alphabet, Google's parent company, is set to release its second quarter earnings after market close on Wednesday. The company remains a key player in artificial intelligence, supported by its extensive data center network and the Gemini AI models. CEO Sundar Pichai recently highlighted that Google's AI Overview reaches 1.5 billion users, with AI-driven queries lasting twice as long as traditional search queries.
Key Drivers for Q2 Performance
Analyst Justin Post from BofA Global Research points to several positives for Alphabet this quarter. These include increased advertising spend, AI contributions to revenue growth, and strong performance in cloud services. Post emphasized the impact of Gemini model improvements, integration of AI Mode in search, and price increases in Workspace as notable factors supporting the company's growth.
Financial Expectations
- Adjusted earnings per share: $2.17
- Revenue excluding traffic acquisition costs (TAC): $79.6 billion, up 11.6% year-over-year
- Advertising revenue: $69.6 billion, a 7.7% increase
- Search revenue: $52.7 billion
- YouTube ad revenue: $9.5 billion
- Google Cloud Platform revenue: $13.1 billion, up 26%
- Cloud operating income: $2.2 billion, a 91% increase year-over-year
While cloud operating income shows strong growth, it is notably lower than the 196% improvement reported in the same quarter last year.
Industry-Wide Cost Management and AI Investment
Like other major tech companies, Google is encouraging employee buyouts amid broader industry headcount reductions. Amazon, Meta, and Microsoft have also announced job cuts as they ramp up capital expenditures on AI development.
Google plans to invest approximately $75 billion this year to expand its AI capabilities. These investments include new data centers equipped with both proprietary chips and Nvidia processors. Despite this massive spending, CFO Anat Ashkenazi noted in the Q1 earnings call that Google still faces capacity challenges, as demand for AI computing power exceeds supply. Investors will closely watch whether these issues improve in Q2.
Legal Risks: Antitrust Rulings and Potential Remedies
Google faces significant legal challenges following a recent antitrust ruling. Judge Amit Mehta of the US District Court for the District of Columbia found Google liable for violating antitrust laws by limiting competition in online search markets.
The judge is expected to issue remedies that could impact Google's dominant position. Possible outcomes include:
- Restrictions on exclusivity agreements with companies like Apple that set Google Search as the default on devices
- A potential forced sale of the Chrome browser, the most widely used web browser globally
Such measures would affect Google's core search business and could have serious financial implications.
What Investors Should Watch
Investors will be paying close attention to how AI drives Google's revenue and whether cloud growth sustains momentum. The company's ability to resolve AI capacity constraints will also be critical.
Additionally, the unfolding legal situation presents a risk factor that could influence Google's long-term profitability.
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