Alphabet shares powered higher in early Wednesday trading, but remain south of their early July peak, after a blowout set of third quarter earnings triggered a wave of price-target changes from top analysts on Wall Street.
Google parent Alphabet (GOOGL) , which is spending billions on AI development and infrastructure as it rolls out its Gemini technology over the whole of its product suite, justified that expense with stronger-than-expected third-quarter earnings and impressive gains in its cloud division.
Google cloud revenue rose 35% from a year earlier to around $11.35 billion, helped in part by the ongoing boost in artificial-intelligence spending from enterprise customers.
Search and YouTube ad revenue also impressed, rising 12.2% to $49.4 billion and $8.9 billion respectively, suggesting the global ad sales market remains strong enough to underpin the group's broader operations as it continues to ramp AI capital spending into the coming year.
"Our reported [capital expenditure] in the third quarter was $13 billion, reflecting investment in our technical infrastructure, with the largest component being investment in servers, followed by data centers and networking equipment," said new finance chief Anat Ashkenazi.
Alphabet: More spending to come
"Looking ahead, we expect quarterly capex in the fourth quarter to be at similar levels to Q3, keeping in mind that the timing of cash payments can cause variability in quarterly reported capex," she added.
"Our expansion of data center capacity is expected to bring economic benefits to countries and communities where we are investing."
The outsized gains in cloud, however, blunted some of the capital spending impact, suggesting that investors are content to provide Google with time to further develop and deploy its AI strategies.
Improved profit margins for the group, which expanded by 6 percentage points to 17%, also indicated that Alphabet's cost-cutting and efficiency drives are starting to show material benefits.
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"We emerge from Alphabet’s earnings incrementally positive on [the] shares," said Citigroup analyst Ronald Josey, who took his price target on Google stock $4 higher to $216 per share.
"Google Search and YouTube revenue growth highlight continued advertiser adoption of its monetization tools as query growth evolves with AI Overviews and broader GenAI search tools," he added.
"While accelerating Google Cloud revenue growth underscores strengthening demand for Google’s enterprise AI tools and greater cloud demand overall, the net result is expanding margins, a trend that we believe can continue."
Lower cost per query at Google
Wedbush analyst Dan Ives was also impressed by Google's efficiency, a portion of which can be attributed to AI advancements, which he noted has reduced its cost per query by around 90% over the past 18 months.
"Management is observing healthy consumer adoption of AI Search features and a rising number of use cases at the enterprise level," said Ives, who lifted his Alphabet price target by $5 to $210 per share following last night's earnings.
"New AI features in Search are resulting in better engagement and higher levels of user satisfaction," he added. "Google recently introduced ads in AI Overviews for mobile users in the U.S. and there is potential for incremental monetization as AI Overviews deepen engagement and generate more complex queries."
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D.A. Davidson analyst Gil Luria, meanwhile, lifted his price target by $20, to $170 per share, noting that "commentary from management suggests that Google's latest AI features and products throughout Search, Ads, GCP, Android, and more are resonating with users, and is leading to greater growth opportunities as these use-cases mature."
Alphabet's 2 billion monthly active users, which are spread across seven product groups, are all now starting to see infusion from the Gemini rollout, which has lead to some investor concern about an erosion in search revenue. Competition from AI-powered chatbots such as ChatGPT, and the rollout of Apple's (AAPL) Apple Intelligence, is also likely to disrupt a key revenue driver for the group.
Search continues to impress
JMP Securities analyst Andrew Boone said, however, that Google's third quarter gains should alleviate some of those worries heading into the final months of the year and beyond.
"While we have concerns around the diffusion of search as Google’s distribution advantage is eroded by the growing number of search access points, including social, chatbots and retail media, we believe overall query growth has also accelerated, driven by search technology’s improved ability to understand complex questions," he said.
"With YouTube well positioned to capture the transition of linear TV dollars to [connected TV] and cloud strength highlighted by this quarter’s accelerating revenue, we continue to view Google as a net beneficiary of AI," added Boone, who lifted his price target on the stock by $20 to $220 per share.
KeyBanc Capital Markets analyst Justin Patterson was also impressed with Google's search gains, noting that while regulatory risks in the space remain, "Alphabet continues to demonstrate solid Search and Cloud growth and expense efficiencies."
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"Even with potential headwinds, we still believe [low double-digit percentage] revenue growth and low-to-mid-teens EPS growth is achievable," said Patterson, who raised his Alphabet stock price target by $15 to $215 per share.
"We acknowledge the near term may still be volatile amid headlines, but believe patient shareholders will be rewarded," he added.
Alphabet shares were marked 6.4% higher in premarket trading to indicate an opening bell price of $180.50 each, a move that would boost the stock's six-month gain to around 11%.
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