'Search unlikely to be uprooted by ChatGPT': From AI competition to massive layoffs, here's what Wall Street is watching for in Alphabet's 4th-quarter earnings
- Google's parent company Alphabet is slated to report fourth-quarter earnings on Thursday.
- Analysts will likely fire off competition questions about the buzzy ChatGPT tool alongside those about the company's traditional search business.
From massive layoffs to competition prospects from the buzzy ChatGPT bot, Wall Street has questions for Alphabet about these issues when the tech heavyweight rolls out its latest quarterly earnings report Thursday.
The Google parent's fourth-quarter financial results are due after the close. The report will follow a 14% rise for the stock since the start of 2023. Shares plunged 39% in 2022 during the rout of Big Tech stocks that left the Nasdaq Composite down 33%.
The company heads into the earnings report after saying last week it's laying off 12,000 employees, following two years of "dramatic growth."
Also last week, the Justice Department and eight states sued Google, claiming it abused its dominance in online advertisement technology. Alphabet said the DOJ's lawsuit "attempts to pick winners and losers." in the sector.
Analysts, on average, are looking for revenue to rise 1% to $76.12 billion. Per-share earnings are expected at $1.18. Alphabet enacted a 20-for-1 stock split in July 2022.
Here's what Bank of America and Jefferies said they may see from Alphabet's financial update.
Jefferies: 'Search unlikely to be uprooted by ChatGPT'
Analysts on Alphabet's conference call are likely to ask about ChatGPT, the language bot from OpenAI that displays a human-like ability to respond to written queries. The tool has been surging in popularity since its November debut. Microsoft recently ramped up its investment in OpenAI.
"ChatGPT vs Google -- Bottom Line: Search Unlikely to be Uprooted by ChatGPT," Jefferies Brett Thill in outlining its "bullish" view on Alphabet in a note published last week.
Thill said search serves much different use cases than natural language AI chatbots and that search is already moving beyond text to multi-modal, including text and images.
More broadly, Jefferies sees "several arguments for the [GOOGL] stock to work" in 2023 despite a slowdown in the macroenvironment that may worsen.
"1) Comps should ease progressively each quarter (gross revs from 23% in 1Q22 to Street est. 2% in 4Q22, and full yr 41% in FY21 to FY22E +10%); 2) potential for cost-cutting measures incl. further headcount reductions to drive upside to current EBITDA ests; 3) share buybacks could exceed 100% of [free cash flow]; and 4) odd years are usually kind to GOOGL stock (on avg up 56% vs down 5.8% in even years)."
Jefferies has a "buy" rating on Alphabet and a $125 price target.
BofA: 'We continue see Google as defensive stock in sector'
Bank of America sees the potential of Alphabet's stock rising to $119, up 23% from Monday's close and prior target of $116. It also raised its 2023 earnings estimate to $5.40 a share from $5.25.
"We assume an FX benefit will offset some incremental core revenue pressure, and expect layoffs to start aiding core Google margins in 2Q, with y/y margins turning positive in 2H'23," analyst Justin Post wrote in a note Tuesday.
"Questions on the competitive threat from ChatGPT could be top item on the [analyst conference] call, but we also expect questions on layoffs, the rationale for $14 billion NFL Sunday Ticket deal, product pipeline (Performance Max adoption), Cloud sales pipeline, outlook for Shorts monetization, and regulatory environment (EU DMA & new DOJ lawsuit)."
"We continue see Google as defensive stock in sector, layoffs & other cost-cutting could lead to 2H margin improvement thesis," he said.
BofA expects fourth-quarter core Google margins to be down 566 basis points year over year as headcount growth outpaces search. It sees quarterly earnings of $1.20 a share versus the $1.21 consensus.
BofA has a "buy" rating on Alphabet.