Alphabet Inc (GOOGL) Q4 Earnings Preview: AI Momentum, Cloud and Impact of Deepseek

TradingKeyFeb 4, 2025 8:09 AM

Alphabet Inc. (NASDAQ: GOOGL) is set to release its Q4 financial results after market close on Tuesday. This comes amid increased volatility in the US stock market, driven by factors such as Donald Trump's tariff threats and the rapid rise of Chinese AI startup Deepseek. While hefty investments in generative artificial intelligence have dominated recent spending, investors are now questioning whether such expenditures are still warranted. To help navigate these uncertainties ahead of the earnings announcement, TradingKey's Assistant Manager in Investment Research, Frank Li, has shared his expert insights.

Google’s Own AI Chip, TPU, Would Further Reduce Its Reliance on Nvidia’s GPU Offerings

Among several tech giants, Google's cloud business is at the lowest level of dependence on NVIDIA's GPU chip supply.

Google's TPUs are already outperforming NVIDIA's year-on-year offerings in localised areas such as Interconnects. At the same time, Google's own TPU has begun to expand its chip leasing business in the cloud services of large customers, Apple currently accounts for 70% of Google's business revenue of such leased TPU chips. Of course, Google's TPU is not independently developed, but with Broadcom cooperation ASIC products, the latter is mainly developed to distinguish the so-called custom chips from Nvidia's general-purpose chips, Google and Broadcom cooperation between the two can be achieved to complement each other's strengths, and in the future it can be predicted that the TPU will deepen the Google to get rid of Nvidia's AI chips.

Then again, from other several big technology giants self-research chip, Meta's current MTIA series chip is only used for advertising recommendations, information flow and other business, in the field of model training performance is still relatively insufficient; Microsoft's Maia AI chip is launched late, and is currently only prioritised for its own cloud services to provide support. Their overall reliance on NVIDIA products is high.

Deepseek's latest emergence into the market has a new impact on the AI industry. Overall, when it comes to the implementation of the development of independent self-research chip outside of Nvidia, Google is still positive. If the plan is to reduce Capex (capital expenditures) in the future, it is also relatively positive for Google.

Steady Revenue Growth

The market is expected to Google's total revenue last year will be around 350 billion U.S. dollars, YOY growth rate of about 13%. This revenue from search engine accounts for the main part of the total revenue. Competition from Chatgpt and other AI tools is still limited, hence, revenue from the search engine business is still growing steadily, especially after Google updated to Gemini2.0.

The difference between Gemini and its competitors are insignificant, reflecting Google's excellent resilience to the market. market's excellent resilience. In addition, the diversified ecosystem and revenue sources have also built a high moat for Google. The future contribution of YouTube is worth paying attention to. Under the risk of TikTok withdrawing from the U.S. market, Youtube's advertising revenue based on the combination of short and long videos will be further boosted.

Breakthrough Progress in Quantum Computers

Google Willow adopts the superconducting quantum technology route to make faster progress, and is able to reduce error rate under the increase of quantum bits, as compared with the previous generation of quantum chips. Willow's overall error rate has been reduced by twenty times. This successful breakthrough further improves Google's worldwide technology platform advantage.

The Impact of Antitrust Litigation

Google's antitrust case is one of the most notable cases, since the Microsoft's antitrust settlement in the year 1998. The U.S. Department of Justice (DOJ)'s final recommendations of splitting up Chrome browser and Android, may have caused a fall of Google's share price. However, based on past experiences, from the 90s Microsoft case related jurisprudence, the market thinks that the Google has a good control of the situation. The possibility of splitting is not looking great.

Valuation

The recent rise of nearly 27 times the PE level in comparison with several other technology giants still appear low.

Retrospectively, since 2023, Google in artificial intelligence gradually recovered after the disadvantage, based on the diversified ecological and major income to maintain a stable trend, including the spin-off risk is relatively controllable background, Google is likely to usher in the value of revaluation!

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