Image Source: Pixabay

Alphabet (GOOG, GOOGL), the parent company of Google, is scheduled to report first-quarter results after the market close on Tuesday, April 25, with a conference call scheduled for 5:00 pm ET. What to watch for:

AI WORRIES: In early February, Microsoft (MSFT) announced its launch of an all-new, AI-powered Bing search engine and Edge browser to "deliver better search, more complete answers, a new chat experience and the ability to generate content." Microsoft said the new Bing experience is running on a new, next-generation OpenAI large language model that is more powerful than ChatGPT and customized specifically for search.

Along with the company's last quarterly report, Sundar Pichai, CEO of Alphabet and Google, said: "Our long-term investments in deep computer science make us extremely well-positioned as AI reaches an inflection point, and I'm excited by the AI-driven leaps we're about to unveil in Search and beyond. There's also great momentum in Cloud, YouTube subscriptions, and our Pixel devices."

On February 6, Google said in a blog post:

"We've been working on an experimental conversational AI service, powered by LaMDA, that we're calling Bard. And today, we're taking another step forward by opening it up to trusted testers ahead of making it more widely available to the public in the coming weeks. Bard seeks to combine the breadth of the world's knowledge with the power, intelligence and creativity of our large language models. It draws on information from the web to provide fresh, high-quality responses... We'll combine external feedback with our own internal testing to make sure Bard's responses meet a high bar for quality, safety and groundedness in real-world information. We're excited for this phase of testing to help us continue to learn and improve Bard's quality and speed."

In early February, UBS said the company's "Google Live from Paris" event was disappointing, as Google failed to directly respond to Microsoft's integration of ChatGPT into Bing search, putting Google's "Catch-22 dilemma on full display." Google could push out strong products in generative AI and enhance existing products with its leading technology here, but likely needs more training before expanding its model broadly, UBS stated.

Meanwhile, Morgan Stanley told investors that artificial intelligence, or AI, presentations from Alphabet and Microsoft speak to significant changes to come around the search user experience, its overall utility and higher incremental search compute costs. While the analyst believes Alphabet has the AI tech and scale to maintain and grow its "leading user base," deeper than expected AI integration "speaks to higher incremental cost risk," said the firm, which sees every 10% of Google Search queries moving to language models adding about $1.2B of operating expenses.

In mid-March, BofA said the firm's analysis of data suggested Bing activity since Microsoft's OpenAI announcement on February 7 was not impacting Google web traffic or search download activity, which has been stable since November. Google CFO Ruth Porat spoke at a broker conference last week and gave some higher-level AI commentary that the firm viewed as "constructive," stating that the commentary on AI suggests products are coming and costs are manageable. BofA keeps a Buy rating on shares of Google parent Alphabet.

Shares of Alphabet were hurt early last week by a news report saying Samsung (SSNLF) was considering replacing Google's search offering with Microsoft's Bing.

After learning Samsung was considering replacing Google with Microsoft's Bing as the default search engine on its devices back in March, Google began to "panic," Nico Grant of The New York Times reported. In response to this threat from AI competitors, Google is racing to build an all-new search engine powered by the technology while also upgrading its existing search engine with AI features, internal documents reviewed by The Times showed.

The new features, under the project name Magi, are being created by designers, engineers and executives working in so-called sprint rooms to tweak and test the latest versions, the publication said. The new search engine would offer users a far more personalized experience than the company's current service, attempting to anticipate users' needs.

On April 20, Alphabet's Google announced that it has merged its two main artificial-intelligence research units. The new unit, Google DeepMind, combines the existing Google Brain and DeepMind research groups into one team. In a blog post, Google and Alphabet CEO Sundar Pichai says that "to ensure the bold and responsible development of general AI, we're creating a unit that will help us build more capable systems more safely and responsibly. This group, called Google DeepMind, will bring together two leading research groups in the AI field: the Brain team from Google Research, and DeepMind."

RECENT ANALYST TAKES: On March 31, Piper Sandler lowered the firm's price target on Alphabet to $117 from $120 and kept an Overweight rating on the shares. The analyst said artificial intelligence is a "real risk" to Google Search revenues. The firm estimates $15B of sales will be "at risk" by 2025, or 7% of Google's total. Google historically has been a leader in AI "but so far appears flat-footed" versus Microsoft, the analyst told investors. However, Piper believes this issue is already reflected in Alphabet's valuation multiple.

On April 18, commenting on the New York Times article that some Google engineers have been in a state of "panic" due to a fear that Google could be displaced by Bing as the default Search engine on Samsung devices by Microsoft's Bing, Evercore ISI agreed with "the general sentiment" that OpenAI and ChatGPT "provide the greatest threat to Google's Search dominance that the company has seen in years." However, the firm also believes the market may underappreciate the strength of Google's existing LLMs, or large language models, like Bard, and its "working assumption" is that Google will successfully rebuild its Search engine to include LLM responses when appropriate. Evercore, which anticipates Google maintaining "both its Search market share and its very profitable unit economics," keeps an Outperform rating and $125 price target on shares of parent Alphabet.

On April 24, Oppenheimer lowered the firm's price target on Alphabet to $135 from $155 and keeps an Outperform rating on the shares after revisiting 2024/2025 margins and updating model to reflect extension of useful life of servers. While the firm thinks investor fears around search share loss and margin headwinds from AI are overblown, Alphabet has yet to launch products or provide a roadmap to placate the bears. In the near-term, investors will be focused on durability of ad trends, likely unchanged from Q4 on FX neutral basis and timing of cost-cutting initiatives, Oppenheimer says.

COST CUTS: Along with the company's last quarterly report, Pichai also said: "We're on an important journey to re-engineer our cost structure in a durable way and to build financially sustainable, vibrant, growing businesses across Alphabet."

On March 31, Ruth Porat, who serves as CFO of both Google and parent company Alphabet, said in a memo to employees to expect more spending cuts as the company tries to meet savings targets this year, reported The Wall Street Journal's Miles Kruppa. Porat wrote in the email, according to the Journal: "Just as we did in 2008, we'll be looking at data to identify other areas of spending that aren't as effective as they should be, or that don't scale at our size... This work is particularly vital because of our recent growth, the challenging economic environment, and our incredible investment opportunities to drive technology forward - particularly in AI."

On April 21, Jennifer Elias of CNBC reported Google has wiped out its development team for the San Jose campus as part of its downsizing that went into effect early this year. In what was supposed to be a mega-campus called "Downtown West," the area was expected to have thousands of new housing units and 15 acres of public parks, but it is now "mostly a demolition zone," the report said.

CONSENSUS EXPECTATIONS: Current consensus EPS and revenue forecasts for Alphabet's March quarter stand at $1.07 and $68.9B, respectively, according to data provided by Refinitiv. That $1.07 EPS estimate for the first quarter is down slightly from where it stood 90 days ago at $1.17 per share, according to Refinitiv.

More By This Author:

U Power Jumps Over 750% In Market Debut
Buy/Sell: Wall Street's Top 10 Stock Calls This Week - Saturday, April 22
Here's What Wall Street Is Saying About Tesla Ahead Of Earnings