Earnings Report Preview | Advertising Business Recovery, AI Boosts Cloud Business, Will Alphabet-C's Earnings Report Bring Surprises?

FAANG's cheapest stock, Alphabet-C, will release its second-quarter earnings report after the closing bell next Tuesday.

Due to the stabilization of its advertising business and favorable trends in artificial intelligence, Alphabet-C's revenue is expected to accelerate compared to the previous quarter. Alphabet may exceed its profit expectations for the second quarter of 2023.

Alphabet-C may also release new information about AI Bard in the coming week, making Alphabet-C stock very attractive before the release of the second-quarter earnings report.

Second Quarter Financial Expectations

According to Bloomberg's consensus estimates, the market expects Alphabet-C's revenue for the second quarter to be $72.7 billion, a YoY growth of 4.4%, with an EPS forecast of $1.32, a YoY growth of 9.2%.

Analysts currently project that Alphabet-C's adjusted earnings per share for the second quarter will reach $1.34, an 11% YoY growth.

Alphabet-C's revenue expectations have been on an upward trend in the past 90 days: earnings per share expectations have been raised 23 times, while downward revisions have only occurred 4 times.

Worst Times for Advertising Business Are Over

Alphabet-C's advertising revenue declined by 3.6% in the fourth quarter of 2022 but stabilized in the first quarter of 2023, indicating that the worst period for the advertising market is behind us.

Due to the expected rebound in the digital advertising market, Alphabet-C's core advertising revenue is expected to remain stable or slightly increase in the second quarter.

Insider Intelligence predicts that digital ad spending in the United States will increase from $244.78 billion in the 2022 fiscal year to $263.89 billion in the 2023 fiscal year, an 8% YoY growth.

Insider Intelligence's forecast for the 2024 fiscal year shows even stronger growth (11% annual growth rate) and suggests that advertisers will allocate a larger share of their ad budgets (77% instead of 75%) to digital marketing companies, a trend that clearly benefits Alphabet-C.

Any Surprises in the Cloud Business?

So far, Alphabet-C's cloud business has been the fastest-growing segment, consistently achieving double-digit revenue growth in recent quarters.

In the previous quarter, Alphabet-C's cloud revenue reached $7.4 billion, a YoY growth of 28%.

Alphabet-C achieved profitability in the first quarter of 2023 (based on revenue) ... Alphabet-C may further expand this achievement in the second quarter of '23.

Artificial intelligence is becoming a powerful growth catalyst for cloud computing companies, and Alphabet-C is making significant investments in this field.

Alphabet-C recently launched its ChatGPT competitor, Bard, and Alphabet-C may announce new revenue streams.

Alphabet-C's valuation lags behind other giants

Alphabet-C currently has a P/E ratio of 20x and a P/S ratio of 4.7x.

This makes Alphabet-C the cheapest FAANG stock in terms of earnings and the second cheapest in terms of revenue.

Alphabet-C's performance lags far behind other FAANG companies, despite offering some of the most diversified businesses (advertising, cloud computing), with free cash flow second only to Apple.

Considering that Alphabet-C generated approximately $15.5 billion in free cash flow each quarter over the past four quarters and announced a $70 billion stock buyback, Alphabet-C still has the most room for growth among FAANG stocks before the earnings report is released.