Alphabet's Revenue Growth Faces Challenges

By Zaheer Kachwala and Deborah Mary Sophia

(Reuters) – Alphabet (NASDAQ:GOOGL) is expected to report its slowest revenue growth in four quarters, primarily due to increased competition affecting its core Google Search business and diminishing YouTube ad earnings.

The anticipated slowdown in core business may overshadow AI-driven improvements in its cloud-computing sector for the third quarter. This quarter marks the first financial report under CFO Anat Ashkenazi, who succeeded Ruth Porat.

Alphabet’s historical dominance in the digital ad market is now challenged by competitors like Amazon (NASDAQ:AMZN) and TikTok, appealing to advertisers eager to access large audiences.

Regulatory risks also loom over Alphabet, as authorities are considering measures to dismantle Google’s perceived “illegal monopoly” on online search.

Analysts predict Google Search and related revenues will grow by 11.6% in Q3, a decline from 13.8% in Q2, according to Visible Alpha.

Emerging competitors, such as Perplexity and ChatGPT, are attracting significant investments, suggesting a potential disruption in search capabilities and accusing Google of being slow to adapt to GenAI advancements, according to MoffettNathanson analysts.

They noted that reversing this negative sentiment will be challenging for Google in the upcoming year, especially regarding its exclusive search advantage across Apple (NASDAQ:AAPL) and Android devices in the U.S.

A troubling report from research firm eMarketer indicated that Google's share of U.S. search advertising revenue might fall below 50% next year for the first time in 18 years. Meanwhile, Amazon’s share is projected to expand to 24%.

In response to competition, Google is enhancing its tools, including showing ads in AI-generated summaries at the top of search results, an effort to maintain its market share.

Alphabet's shares dropped nearly 9% in Q3, the largest fall since Q3 2022, although they have increased by 17% so far this year.

Overall, Alphabet's revenue is expected to rise by 12.6% in Q3 to $86.31 billion, lower than the previous quarter's 13.6% growth, according to LSEG analysts.

YouTube is projected to see revenue growth of 11.5%, slower than the 13% increase achieved in Q2, partly due to advertising shifts towards ad-supported streaming services like Netflix (NASDAQ:NFLX) and Amazon Prime Video. However, analysts at Truist believe YouTube, particularly YouTube TV, benefitted from increased political ad spending in Q3.

The Google Cloud segment is anticipated to report a robust growth rate of 29.2%, marking the fastest increase in seven quarters as clients boost spending on AI services, including the Vertex (NASDAQ:VRTX) AI platform.

Alphabet warned in July about maintaining high capital expenses this year due to ongoing investments in AI to remain competitive, a situation echoed by peer cloud providers. Amazon's cloud revenue is expected to grow by 19.3% in Q3, while Microsoft (NASDAQ:MSFT) anticipates about 11% growth.

With CFO Ashkenazi now at the helm, investors are keen to see strategies for cost management. BofA analysts suggest the potential for unexpected cost-cutting measures in 2024, following minimal layoffs.