Retail sentiment for GOOGL shifted to ‘extremely bullish’ from ‘bullish.’
- Morningstar said investors were underappreciating the breadth and depth of Alphabet’s AI monetization and growth at Google Cloud, even as GOOGL stock dipped.
- “Google Search & other” revenue grew at 12% in Q3, compared to the 17% growth pace in the preceding Q2.
- Alphabet attributed the slowing rate to foreign exchange rates and one-off ad spend dips in the Asia-Pacific market.
Alphabet, Inc.’s (GOOGL) shares dropped more than 10% in early premarket trading on Thursday after it reported weakness in its core advertising and search businesses, with top and bottom lines below analysts’ expectations.
Morningstar said Alphabet’s AI strength remains intact. “We raise our fair value estimate for wide-moat Alphabet to $450 from $433, and continue to view shares as attractively priced,” its analysts wrote. “We believe that investors are underappreciating the breadth and depth of Alphabet’s AI monetization and the rapid upcoming growth in Google Cloud.”
The new fair value estimate is 38% above GOOGL’s last close and above Wall Street’s average price target of $329.68, according to Koyfin.
Morningstar argued that Google Cloud’s 103% growth last quarter was the strongest sign of AI-led business momentum for the company. “Not only is the segment’s growth stellar, its backlog, or future contracted revenue, is five times annualized quarterly sales, providing the business great visibility as it invests in AI infrastructure,” Morningstar said.
On Search performance, it said the deceleration will remain gradual, allowing Alphabet to maneuver its business and drive most sales from nonsearch businesses within five years. Morningstar also praised Google’s custom chips business as a differentiator, which also helps the company better absorb AI-related costs.
Google Search, Ad Growth Slows
“Google Search & other” revenue slowed, growing at 12% to $63.3 billion, compared to the 17% growth pace in the preceding second quarter. Overall advertising sales rose 10.6% to $82.01 billion, compared to 14.4% in Q2.
Chief Business Officer Philipp Schindler attributed the slowdown to foreign exchange rates and one-off dips in advertising spending in Asia-Pacific among advertisers affected by the EU’s elimination of its de minimis exemption. He also added that Q2 had been unusually strong due to advertising linked to the FIFA World Cup.
“When you look at the change in growth rate from Q2 to Q3, there were a few drivers here. So first, there was FX. It was the single largest driver of Search deceleration relative to Q2. Second, there were vertical-specific dynamics. In retail, some of our APAC advertisers were impacted by the EU eliminating its de minimis exemption,” Schindler said.
Also, “spend normalized after an unseasonably strong Q2, driven by the FIFA World Cup, which had more matches and therefore, more advertising budgets allocated in June than actually in July.”
Schindler also flagged that while users are increasingly using Google’s AI-powered search experience, AI Mode, the system has fewer baked-in ads and therefore makes less money.
Retail View On GOOGL
GOOGL was the top trending ticker at the time of writing, with sentiment shifting to ‘extremely bullish’ from ‘bullish.’
“$GOOGL everyone forgets that even if Google is losing search to AI, Gemini is an AI search and Google owns the internet,” said a trader. “YouTube is also outpacing Spotify for podcast content, seniors are switching to YouTube tv, Waymo, quantum, and so much more. Google isn’t just AI. Thanks for the cheapies. Buy. Hold. Never sell.”
As of its last close, GOOGL stock was up 4%.
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