Alphabet’s Earnings Could Surprise—Should You Buy Now?

Key Points

• Ahead of earnings, GOOGL has underperformed most Magnificent 7 stocks YTD, rising only 18.31%, with legal challenges and AI competition clouding its outlook.
• Expanding generative AI capabilities, Android's strength, and solid search and cloud momentum are expected to drive Alphabet's Q3 results despite regulatory headwinds.
• Analysts remain optimistic, with a consensus price target of $201.76, suggesting a 22% upside, as the stock consolidates in a bullish formation ahead of its October 29 earnings release.

Alphabet NASDAQ: GOOGL has underperformed most of the "Magnificent 7" stocks this year, with shares up just 18.31% YTD, only outperforming Microsoft and Tesla. Legal challenges and increasing competition, particularly from AI-powered tools like ChatGPT, have raised concerns about Alphabet’s ability to maintain its dominant position in search and advertising. As the company prepares to release its earnings on Oct. 29 and is currently consolidating in a bullish formation, might it be a buy ahead of earnings despite facing several challenges?

Legal Battles Add Pressure to Alphabet

Alphabet faces mounting legal challenges that have weighed on the stock. In August, a federal judge ruled that the company violated antitrust laws by using unfair practices to dominate search advertising, specifically through its $20 billion annual payment to Apple NASDAQ: AAPL to ensure that Google remains the iPhone's default search engine. The outcome of this case, which may disrupt that deal, remains uncertain as it heads into a second trial phase.

Alphabet’s legal troubles don’t end there. Yelp has filed a lawsuit, accusing Google of abusing its local search and advertising monopoly. Additionally, the Department of Justice’s “DoubleClick trial,” related to Google’s 2008 acquisition of the digital advertising firm, claims Google’s dominance has harmed advertisers and content creators. A ruling in that case is expected by the end of 2024, adding more uncertainty.

More recently, on October 7, a U.S. judge ruled that Alphabet must allow third-party app stores on Google Play, such as the Epic Games Store, and stop requiring developers to use Google’s billing system. Alphabet plans to appeal the decision, but the legal overhang continues to cloud the stock’s outlook.

AI Competition Intensifies

The rise of generative AI (Gen AI) presents both opportunities and risks for Alphabet. OpenAI’s ChatGPT and its newly announced SearchGPT tool directly challenge Google’s core search business. Although Alphabet has made strides with its Gemini AI model and integrated AI into its search engine, analysts debate whether Google leads or lags behind AI-focused startups like OpenAI.

To counter Microsoft’s partnership with OpenAI, Google has made its AI tools, such as Gemini, available to developers and embedded them into its search platform. The success of these initiatives will be crucial as investors evaluate Alphabet’s ability to defend its market share.

Despite these competitive threats, Alphabet’s quarterly results are expected to benefit from Android’s strength and solid momentum across its search and cloud businesses. Expanding Gen AI capabilities have likely been a key growth driver. These factors are expected to offset concerns about increasing regulatory headwinds and sustain the company’s long-term growth trajectory.

Analysts Expect Strong Earnings

Analysts are optimistic about Alphabet’s upcoming earnings release. For Q3, Alphabet is expected to report earnings per share (EPS) of $1.84, representing 19% growth year-over-year. Revenue is forecast to rise 13% to $86.4 billion, with the cloud computing segment leading the charge. Google Cloud revenue is projected to grow 29% to $10.87 billion, reflecting robust demand for cloud services and generative AI integration.

Alphabet’s portfolio also has momentum beyond its core search business. Despite competition from TikTok, YouTube continues to show resilience, with YouTube Shorts generating roughly 70 billion daily views. Alphabet is also seen as a leader in autonomous driving through Waymo.

Favorable Analyst Ratings and Technical Setup

Heading into earnings, analysts are bullish on Alphabet's prospects. Based on 39 ratings, the stock holds a Moderate Buy rating, with 32 analysts assigning a Buy rating. The consensus price target of $201.76 implies a 22% upside, while Wedbush recently reiterated its Outperform rating with a $205 price target, forecasting a 27% potential gain from current levels.

Technically, GOOGL appears primed for a move. The stock has consolidated above several key moving averages, such as the 20-day, 50-day, and 200-day, near the $160 mark, closing at $165.27 on Friday. This convergence of moving averages suggests a bullish setup, typically preceding a breakout. However, with earnings as a potential catalyst, investors should brace for volatility, as the stock could experience a sharp move in either direction depending on the results.