Image Source: Pixabay

Alphabet (GOOGL), the parent company of Google, is scheduled to report third quarter results after the market close on Tuesday, October 29, with a conference call scheduled for 4:30 pm Eastern Time. What to watch for:

PRODUCT MOMENTUM, AI INNOVATION: On July 23, along with Alphabet's Q2 report, Sundar Pichai, CEO of Alphabet and Google, said "strong performance" in the quarter "highlights ongoing strength in Search and momentum in Cloud."

Ruth Porat, President and Chief Investment Officer; CFO added: "We delivered revenues of $85 billion, up 14% year-on-year driven by Search as well as Cloud, which for the first time exceeded $10 billion in quarterly revenues and $1 billion in operating profit. As we invest to support our highest growth opportunities, we remain committed to creating investment capacity with our ongoing work to durably re-engineer our cost base."

About a week later, on July 29, Phillip Securities analyst Jonathan Woo upgraded Alphabet to Buy from Accumulate with a price target of $205, up from $195. Alphabet is still the dominant player in digital advertising and the market leader in artificial intelligence, the analyst tells investors in a research note. The firm says the stock is currently trading at attractive valuations post the Q2 report.

More recently, on October 14, Evercore ISI analyst Mark Mahaney made three tactical calls into the quarterly reports from the Internet Large Cap group, adding Expedia (EXPE) and Alphabet to the firm's "Tactical Outperform" list and adding Airbnb (ABNB) to the firm's "Tactical Underperform" list. For Alphabet, the firm sees "a stock that has underperformed intra-quarter," with "relatively modest Street expectations" for Search, YouTube, and Cloud revenue growth in Q3, the analyst tells investors. The analyst, who views the Street's Q3 gross revenue and advertising revenue estimates as "fairly reasonable," thinks the parent of Google could "print a Modest Beat & Bracket Q3."

ANTITRUST FIGHTS: In early August, a federal judge ruled Google's payments to make its search engine the default on smartphone web browsers violates U.S. antitrust law in what Bloomberg's Leah Nylen called "a key victory" for the Justice Department. Antitrust enforcers alleged that Google has illegally maintained a monopoly over online search and related advertising, having paid Apple (AAPL), Samsung (SSNLF) and others billions over decades for prime placement on smartphones and web browsers.

Kent Walker, Google's President, Global Affairs, said in a statement: "This decision recognizes that Google offers the best search engine, but concludes that we shouldn't be allowed to make it easily available. We appreciate the Court's finding that Google is 'the industry's highest quality search engine, which has earned Google the trust of hundreds of millions of daily users,' that Google 'has long been the best search engine, particularly on mobile devices,' 'has continued to innovate in search' and that 'Apple and Mozilla occasionally assess Google's search quality relative to its rivals and find Google's to be superior.' Given this, and that people are increasingly looking for information in more and more ways, we plan to appeal. As this process continues, we will remain focused on making products that people find helpful and easy to use."

After Judge Amit Mehta ruled against Google in the antitrust lawsuit challenging the company's commercial agreements with search distribution partners Apple, Android, and other web browsers, JPMorgan said the firm believes the trial would move to a remedy discovery phase to determine what Google needs to change and whether punitive fines, if any, will be imposed. Importantly, JPMorgan expects any remedies to be directed toward Google and not search distribution partners, but those remedies could certainly influence the path forward for search on Apple, Android users, and other web browsers, the analyst told investors. Considering that about half of all search queries in the U.S. are running through contested access points, and 48% of Alphabet's revenue is in the U.S., the firm believes the contested contracts could represent up to 25% of Google's Search revenue, or 15% of Alphabet total revenue. If the Google-Apple search agreement can no longer continue in its current structure, JPMorgan believes search on Apple devices could shift to a non-exclusive consumer choice model, default search through competing search engine providers, including Microsoft (MSFT) and OpenAI, and Apple's own internal search capabilities.

Barclays, meanwhile, said at the time that the firm expected Alphabet's Google to lose the Department of Justice trial. Most investors are quick to conclude that the outcome here will be "no TAC, keep the queries" for Google which seems unlikely, the analyst argued. The firm said the remedies detail is key and investors have to wait a few months for those. "Nobody wins here, not Google or Apple (AAPL), except the Justice Department," contended Barclays.

Later that month, Barclays analyst Ross Sandler said the investment community had "started to wake up to the reality" that Alphabet "finds itself in a challenging situation." The firm says it now must consider scenarios and consequences of Google breaking U.S. antitrust laws. Alphabet and Apple "are both in a very precarious situation," as many roads lead to the unwind of the Information Services Agreement contract and all of its elements that have benefited both companies for the past decade, the analyst told investors. Barclays sees a range of outcomes from the antitrust case between 2%-41% of Alphabet gross profit being eliminated by remedies, which could involve structural changes like divesting Chrome, Android or AdWords as has been reported in the press, added the firm, which kept an Overweight rating on Alphabet shares.

In early September, Macquarie contended that the "trial of the century is not last month's Google search case (which it lost), it's this month's DOJ lawsuit aiming to break up Google's ad tech." The DOJ trial against Google's ad tech started September 9 and after going through court filings to see how intent the DOJ appeared to be to break up Google, the analyst said the firm would be "surprised if a financial settlement is acceptable." The firm believes one reason stocks like Trade Desk (TTD), Magnite (MGNI) and Criteo (CRTO) have rallied this year is improved performance in light of moves Google has already made to help level the playing field and it thinks "the landscape could become a lot more amenable to independent ad tech companies" if the DOJ wins, telling investors that it sees upside to ad tech companies including the trio mentioned as well as PubMatic (PUBM) and LiveRamp (RAMP) in the event of "another Google lost court battle."

In early October, a U.S. judge ordered Alphabet's Google to overhaul its mobile app business to give Android users more options to download apps and to pay for transactions within them, following a jury verdict last year for "Fortnite" maker Epic Games, Reuters' Mike Scarcella reported. The injunction by U.S. District Judge James Donato in San Francisco outlined the changes Google must undertake to open up its lucrative app store, Play, to greater competition, including making Android apps available from rival sources, the author notes.

Lee-Anne Mulholland, Vice President, Regulatory Affairs, stated in a Google blog post: "Today, the court overseeing our ongoing U.S. legal proceedings with Epic Games ordered changes to Android and Google Play, requested by Epic. As we have already stated, these changes would put consumers' privacy and security at risk, make it harder for developers to promote their apps, and reduce competition on devices. Ultimately, while these changes presumably satisfy Epic, they will cause a range of unintended consequences that will harm American consumers, developers and device makers. These Epic-requested changes stem from a decision that is completely contrary to another court's rejection of similar claims Epic made against Apple - even though, unlike iOS, Android is an open platform that has always allowed for choice and flexibility like multiple app stores and sideloading. We are appealing that underlying decision and we will ask the courts to pause Epic's requested changes, pending that appeal."

On October 9, the Department of Justice indicated that it was considering a possible breakup of Google as an antitrust remedy. The remedies necessary to "prevent and restrain monopoly maintenance could include contract requirements and prohibitions; non-discrimination product requirements; data and interoperability requirements; and structural requirements," the department said in a filing. The DOJ also said it was "considering behavioral and structural remedies that would prevent Google from using products such as Chrome, Play, and Android to advantage Google search and Google search-related products and features - including emerging search access points and features, such as artificial intelligence - over rivals or new entrants." Additionally, the DOJ suggested limiting or prohibiting default agreements and "other revenue-sharing arrangements related to search and search-related products" and that one way to do this is requiring a "choice screen." "Fully remedying these harms requires not only ending Google's control of distribution today, but also ensuring Google cannot control the distribution of tomorrow," the DOJ said.

Lee-Anne Mulholland at Google then said in a blog post: "The DOJ shared a broad outline of radical changes it may demand as part of its lawsuit over how we distribute Search. This is the start of a long process and we will respond in detail to the DOJ's ultimate proposals as we make our case in court next year. However, we are concerned the DOJ is already signaling requests that go far beyond the specific legal issues in this case. This case is about a set of search distribution contracts. Rather than focus on that, the government seems to be pursuing a sweeping agenda that will impact numerous industries and products, with significant unintended consequences for consumers, businesses, and American competitiveness. The DOJ's outline also comes at a time when competition in how people find information is blooming, with all sorts of new entrants emerging and new technologies like AI transforming the industry. Forcing Google to share your search queries, clicks, and results with competitors risks your privacy and security. It's widely recognized, including explicitly by the DOJ in its outline, that forcing the sharing of your searches with other companies could create major privacy and security risks. Hampering Google's AI tools risks holding back American innovation at a critical moment. Not only is AI a new industry, but it's hard to think of a technology more important for America's technological and economic leadership. Splitting off Chrome or Android would break them - and many other things. Changes to the online advertising market would make online ads less valuable for publishers and merchants, and less useful for consumers. Unreasonable restrictions on how Google promotes our search engine would create friction for consumers and harm businesses. We believe that today's blueprint goes well beyond the legal scope of the Court's decision about Search distribution contracts. Government overreach in a fast-moving industry may have negative unintended consequences for American innovation and America's consumers. We look forward to making our arguments in court."

While the court filing in which the DOJ outlined its initial proposed monopoly remedies, including a broad set of potential measures aimed at addressing how Alphabet may distribute and manage its Search services in the future, did weigh on the stock, BofA said the firm expected the DOJ to be aggressive, per press reports, and believed that the initial proposed set of remedies were "generally in line with investor expectations." The firm, which anticipates "more twists and turns in the case ahead," sees positives, including its belief that Google is well-positioned in the search market today; that Google's counter proposals in December will likely provide a more positive potential outcome; that limited layoffs so far compared to peers give the company's new CFO a positive cost basis set up to drive EPS growth; and the view that Alphabet already trades at a discount to break up value. BofA maintains a Buy rating and $206 price target on Alphabet shares.

On October 18, Google and "Fortnite" maker Epic Games confirmed to The Verge that Judge James Donato granted the search giant a temporary administrative stay on a November 1 deadline to drastically change its Android app store rules. As a result, Google might not have to open up its Play Store for years, if at all, while it appeals the jury verdict in the Epic legal battle, The Verge's Wes Davis and Sean Hollister reported. The one exception to the stay, however, is that starting November 1, 2024 and continuing until November 1, 2027, Google is prohibited from making deals with carriers or device makers that block preinstallation of competing app stores in exchange for money, revenue share, or perks, the authors noted.

EXPECTATIONS: Current consensus EPS and revenue forecasts for Alphabet's September-end quarter stand at $1.84 and $86.31B, respectively, according to data provided by LSEG Data and Analytics, formally Refinitiv.

That $1.84 EPS estimate for the third quarter is up 1c over the past 90 days ago, according to LSEG Data.

Among analysts tracked by Bloomberg that have updated their views on Alphabet within the last twelve months, 58 have Buy or equivalent ratings, 12 have Hold or equivalent ratings and the average twelve month price target of 44 of those analysts is $202.85.

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