Is Alphabet Stock a Buy for Investors Ahead of Q3 2024 Earnings?

TradingKeyOct 29, 2024 7:46 AM

TradingKey - When investors think of “Big Tech” in the US, it’s likely that Alphabet Holdings (NASDAQ: GOOGL) comes to mind. That’s because the company’s main business is the globally-dominant search engine Google.

Recently, investors have become concerned given Google’s dominance in the search space is under threat from the rise of AI-powered search competitors like ChatGPT and Perplexity. However, the company still has other strong businesses, such as its cloud computing service – Google Cloud – and YouTube.

The concerns over the search business have recently seen some investors in the market label Alphabet as a “value stock” given how cheap it has been trading – on a valuation basis – versus some of the other Big Tech companies.

Investors will have a chance to see how Alphabet’s businesses are doing when the company reports its latest Q3 2024 results on Tuesday (29 October) after the market closes. So, should investors consider buying its stock ahead of earnings?

Guidance and capex on the agenda

The last earnings update for Alphabet came in July – for Q2 2024 – and the company’s stock fell over 4% following that report, even as the company beat expectations on revenue. That’s mainly because investors focused on the increased capital expenditure spending, mainly driven by its Google Cloud unit.

The increased capex of US$13.2 billion in Q2 2024 was up from US$7 billion in Q2 2023, surprising investors. Similar to Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN), investors want to see more revenue in return for the increase in Alphabet’s AI capex spending.

Similarly, revenue from Alphabet’s YouTube business came in slightly lower than expected in Q2 2024. YouTube, which relies on digital ad spending, saw revenue of US$8.7 billion during the period – below expectations.

In terms of commentary, investors will be watching closely whether the US presidential election (due on 5 November) will have resulted in an uptick of ad spending on its various platforms, including both Google and YouTube.

As always, forward guidance will also be important for Alphabet as the company updates investors on their various initiatives, including progress on its AI search platform (Gemini) and whether margins will be further impacted by the increased capex spend.

Transition in the C-suite and reorg strategy

Investors in Alphabet will also be keen to see whether the company’s new CFO – Anat Ashkenazi – fares. She took over from longtime CFO Ruth Porat, who stepped down after eight years in the role on 31 July 2024.

Amid this reshuffling in the C-suite, Alphabet is also restructuring its finance organisation to better pursue opportunities in AI and various initiatives surrounding the technology. As a result, investors will be looking to Alphabet’s new CFO to see what initiatives (if any) are being started to increase monetisation of the company’s AI-related businesses.

The company’s large cash pile, and its failed attempts at buying two large businesses earlier this year, means there could also be some attention on whether Alphabet is still looking to acquire.

During the Q2 2024 earnings call, CFO Porat stated that operating margin would be under more pressure in Q3 2024 due to spending on AI and cloud computing, as well as some depreciation.

Looking to capital allocation

Finally, Alphabet initiated its first-ever dividend in April of this year. That was long overdue for many people, who believed the company should distribute more of its massive profits to shareholders. During the announcement, Alphabet also unveiled a US$70 billion share buyback.

Given Alphabet shares trade for around 21x forward price-to-earnings (PE), many in the market are calling its shares as reasonable at this level – at least compared to other “Magnificent Seven” stocks like Tesla Inc (NASDAQ: TSLA) or Nvidia Corp (NASDAQ: NVDA). Any large beat or positive news on the back of Tuesday’s Q3 2024 earnings announcement from the company could potentially result in a relatively big share price jump.

So far in 2024, Alphabet shares have risen 19.6% but have still trailed the S&P 500 Index’s 22.5% gain over the same period.

Disclaimer: The content of this article solely represents the author's personal opinions and does not reflect the official stance of Tradingkey. It should not be considered as investment advice. The article is intended for reference purposes only, and readers should not base any investment decisions solely on its content. Tradingkey bears no responsibility for any trading outcomes resulting from reliance on this article. Furthermore, Tradingkey cannot guarantee the accuracy of the article's content. Before making any investment decisions, it is advisable to consult an independent financial advisor to fully understand the associated risks.