Alphabet's Q3 Results: AI Investments Shape Expectations

Alphabet, the parent company of Google, will announce its third-quarter financial results on Wednesday evening. Investors are eagerly awaiting to see how the artificial intelligence (AI) boom has contributed to this tech giant, as well as what potential harms it may have inflicted.

According to consensus estimates tracked by Bloomberg, Alphabet is expected to report revenue of $99.85 billion for the third quarter. This represents a 13% increase compared to the same period last year.

Analysts project that Alphabet's adjusted earnings per share for this quarter will be $2.26, reflecting a 7% increase from the $2.12 reported in the same period last year. However, this will be the lowest earnings growth in over two years, largely due to a recent competition fine imposed by the European Commission.

Alphabet is gradually showing signs of benefiting from the AI boom, having signed significant deals for its cloud services with major AI developers as popularity for its Gemini AI models increases. However, AI chatbots like ChatGPT, developed by OpenAI, are raising risks for the company's core search business.

Loop Capital analyst Rob Sanderson stated in an investor note on October 23, "We are confident that Google will generate significant value from AI." However, he added, "There is significant structural uncertainty about whether Google can maintain its dominance in search."

The ChatGPT Atlas Web browser, recently announced by OpenAI, has pushed AI developers into closer competition with Google, causing a drop in Alphabet's shares in a short period.

Nonetheless, Wall Street analysts remain optimistic about the company's stock, buoyed by recent AI deals related to Google Cloud and the upcoming launch of the Gemini 3 model. Furthermore, a favorable ruling for the company in the upcoming historic antitrust case with the U.S. Department of Justice has alleviated investors' concerns.

Alphabet shares surged over 40% to nearly $268 after the last quarter's earnings exceeded Wall Street projections. The company announced in September that its market value surpassed $3 trillion.

Analysts from JPMorgan, Bank of America, Morgan Stanley, Morningstar, and Loop Capital raised their price targets for Alphabet shares to as high as $300 in the last month.

JPMorgan analyst Doug Anmuth noted, "An affirmative outcome in the DOJ Search Business Agreement case eliminated major uncertainty, but Google also continues to show strong financial performance and remains a leader in AI."

Recently, many major AI players, including Google's rivals, have signed agreements to utilize Google Cloud services. OpenAI added Google to its list of cloud infrastructure providers in July. Meta reportedly signed a $10 billion deal with Google Cloud to secure AI computing capacity. Anthropic announced a deal with Google Cloud for using specialized AI chips called TPUs, which is estimated to potentially generate $10 billion in annual revenue for Alphabet.

These agreements are expected to bolster Google Cloud's future revenue from customer contracts. Analyst Malik Ahmed Khan stated that this segment would be the largest growth driver for Alphabet in the third quarter, expecting revenue to increase by 30% for this quarter.

Khan added that investors would examine the algorithms and look into how Alphabet is monetizing its AI investments, while Wall Street is generally watching the AI spending figures of major tech firms.

Alphabet is expected to report $22.4 billion in capital expenditures, reflecting a 71% increase from last year.

Khan remarked, "The question of return on investment remains the biggest uncertainty in the overarching AI ecosystem."