Google investors have big expectations after stock’s sharpest quarterly rally in 20 years

Alphabet Inc. is gearing up for a pivotal earnings report on Wednesday, facing heightened expectations from investors following a remarkable 38% stock surge in the third quarter—the company's most significant quarterly increase in 20 years. The stock has continued to climb, rising an additional 11% in October and reaching record highs recently. Despite this impressive rally, revenue growth has been relatively stagnant, hovering in the low teens, with projections suggesting a modest 12% growth for the next year. Investors are recalibrating their outlook after experiencing more robust growth prior to the 2022 slowdown. A significant portion of the recent optimism stems from Alphabet's enhanced position in the artificial intelligence landscape. However, the stock's spike in the third quarter was largely attributed to Alphabet's favorable outcome in its search antitrust case, rather than its advancements in AI. In early September, shares jumped following a ruling by U.S. District Judge Amit Mehta, who determined that Google would not need to divest its Chrome browser but must share data with competitors. Mehta noted that the rise of AI services, particularly from firms like OpenAI, has intensified competition in the search market. Investors reacted positively to this ruling, but now the focus turns to whether Google can assert itself as a front-runner in AI, a sector that is becoming a critical growth driver for technology companies. Google's cloud division stands to gain significantly from the AI boom, as businesses increasingly rely on this technology for large language model operations and workload expansion. The tech giant is committing substantial resources to Gemini, its suite of AI models and services. Analysts from KeyBanc Capital Markets recently raised their price target on Alphabet's stock from $265 to $300, anticipating that the upcoming quarterly results will reflect accelerated product development across its Search, Cloud, and autonomous vehicle unit, Waymo. The analysts attributed the stock's rise to a combination of the favorable antitrust ruling and progress in AI initiatives. With Alphabet set to disclose its results alongside competitors Microsoft and Meta, Wall Street predicts a revenue increase of 13%, translating to approximately $99.89 billion and earnings per share of $2.26, according to LSEG. However, not all analysts are optimistic about Google's AI positioning. Bernstein analysts expressed caution, citing concerns that Judge Mehta's remarks regarding generative AI's competition with traditional search could be a cause for alarm for investors. They emphasized that while the competition is fierce, it doesn't spell disaster for Google, which has retained a hold rating on its stock. Mehta's ruling included a detailed analysis of generative AI and its market dynamics, outlining a landscape filled with numerous new entrants and significant funding. According to data from StatCounter, ChatGPT currently dominates the global AI chatbot market with an 81% share, followed by Perplexity at 11%. In response to these competitive pressures, Google is positioning Gemini as more than just a rival to ChatGPT. The company launched Gemini Enterprise to serve corporate clients with tailored AI agents and is rolling out Gemini features in Chrome for both Mac and Windows, allowing users to leverage AI for various tasks. Although the recent ruling has generally been well-received, it does require Google to share certain search and user data with qualified competitors. Determining which companies qualify will fall to a technical oversight committee yet to be established. Potential beneficiaries may include services like DuckDuckGo and Microsoft Bing, which could gain improved access to Google’s search index data under specific licensing terms. Some analysts believe the impact on Google could be minimal, as the ruling does not mandate data sharing with generative AI competitors like OpenAI. Google has indicated plans to appeal the ruling and has expressed concerns about its implications for user privacy. Legal experts suggest that while it may provide some competitive advantages to rivals, the ruling is unlikely to significantly disrupt Google's operational dynamics.