Earnings Report Preview | Search advertising business rebounds, Alphabet's revenue growth is expected to return to double digits.

According to the information obtained from the Zhitong Finance APP, Alphabet (GOOGL.US), the parent company of Google, will release its third-quarter earnings report for 2023 after the US stock market closes on October 24th (early morning of November 25th Beijing time). Market expectations are that Google's Q3 revenue will be $75.78 billion, with a projected YoY growth of 10%; and the expected earnings per share will be $1.45, with a projected YoY growth of 36%.

Revenue growth returns to double digits

Based on the average consensus estimate of analysts, it indicates that Google's revenue is expected to grow by nearly 10% compared to the same period in 2022, bringing Google's revenue growth back to almost double digits.

It is worth noting that after experiencing a decline for 12 to 14 months, analysts' revisions to Alphabet's revenue have gradually begun to show an upward trend, indicating that market sentiment is finally starting to strengthen.

Search business and YouTube still have room for growth

Google's search advertising business is accelerating its growth. Specifically, the macro environment for search and YouTube ads in the third quarter appears to be stable, slightly better than the second quarter. This, coupled with favorable YoY comparisons, is expected to drive a close to double-digit YoY growth rate in the third quarter, which may continue into the fourth quarter.

Secondly, YouTube performed well in the third quarter. According to Evercore's data, both YouTube's DAU (Daily Active Users) and engagement have seen significant increases compared to their respective 2022 benchmarks.

Specifically, YouTube's user stickiness increased by 4% YoY, while its daily active users increased by 7% YoY and 1% QoQ, surpassing the milestone of 2 billion daily active users. In addition, it is estimated that in August, YouTube accounted for 9% of total TV viewing time in the United States, consolidating its position as a leading streaming video channel on CTV (Connected TV). In other words, YouTube's viewership is one percentage point higher than Netflix, which is valued at nearly $200 billion.

Thirdly, there is also the growth of cloud services and the promotion of new generation artificial intelligence. Although Google's cloud business has experienced a slowdown similar to the previous quarters (expected YoY growth of 26-27%), the growth of around 25% is still very helpful for the overall expansion of the group's revenue. In addition, investors should also consider that Google's cloud business is now profitable. Therefore, investors are more interested in seeing how the annual growth rate of profitability increases, rather than estimating whether the revenue will grow by 25% or 29%.During the earnings conference, analysts were interested in understanding the progress of Google Cloud in the commercialization of Duet AI and Vertex AI, and how this will drive growth and profits in the fourth quarter and early 2024. In this context, the impact of Generative AI on Google Search and other businesses remains a topic of debate, primarily focused on the timing of Gemini's release. Undoubtedly, increased confidence in Gemini can help Google narrow the gap with competitors such as OpenAI and Microsoft, which would be a positive development for the company's stock price.

Capital expenditures and adverse judgments

As Google is building general AI products, it is expected that the company will guide investors to increase capital expenditures. For the third quarter, investors should be prepared for Google's disclosed capital expenditures to exceed $10 billion, reflecting a year-on-year growth of over 30%. As for capital expenditure investments in the fourth quarter and fiscal year 2024, it is expected that Google management will not provide precise figures.

Google's capital expenditure investments are crucial because an increase in capital expenditures will affect the company's ability and willingness to repurchase stocks, which is another topic worth paying attention to in the third quarter. It is expected that there will be $15 billion in stock repurchases in the third quarter, on par with the second quarter. Anything below this figure would be disappointing, especially in the case of accelerating revenue and profit growth.

Lastly, the U.S. Department of Justice is currently litigating Google's business agreements with search distribution partners. During the third-quarter conference call, it is expected that management will provide some guidance on their views on the trial and the potential impact of the judgments rendered so far.