4 advantages give Alphabet a 'strategic position' in AI race
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alphabet set to report second quarter results on Wednesday, analysts overall optimistic on the tech giant. The stock having 63 buys on the street according to coverage tracked by Bloomberg, but while there are attractive trends at play for alphabet, we know the antitrust risk for the mag 7 stock do hang its overhead here to discuss this and more. Got Needham senior media and internet analyst Laura Martin. Laura, it is great to see you on the show as always. The concern for investors, Laura, on this one, as you well know, and I'm looking at the stock, it's basically flat year to date, is how AI is going to disrupt search, how it's going to disrupt Google's bread and butter. I'm sure you get questions, of course, from your clients about this, Laura. What do you tell them?
So I think what we need to see, we're looking for Google to report 9% search growth, 13% YouTube growth, cloud growth of 10. What we want to see is that search number, that search ad number sort of holding up right around double digits, the above 10% would beat the whisper number. Below 9% would be bad. That would imply that generative AI answers is eating into their revenue per query. They're telling us that the revenue is equal, so that that's why growth hasn't slowed. But if we see a break in that, that would be bad for the shares. But so long as they report over 9% ad revenue growth from search, specifically, I think the stock's fine. It bottomed in April. It's had a nice run since April, but as you say, year to date, flat from the beginning of the year to now. So we would expect better performance in the shares if search breaks double digit growth, uh, revenue growth in this, the second quarter.
As Laura, as Google now finds itself in this competition with the likes of an open AI, what would you say its competitive advantages are?
Well, I think the most important thing that people miss about Google is that, you know, it has a dominance in search, which is now threatened, I guess. But, okay, so search, but it also happened to have the number two mobile, um, choice, which was Android. It now has a cloud business, which Amazon invented and these guys were late to, but they're one of three winners. They're one of three cloud companies with Amazon and Microsoft. And now it's got the Gemini, which is one of the top two or three, depending on who you ask, large language models, proprietary large language models. So in every case, for the last four technological disruptions, Google has a place, a place to play, and these are winner take all economics. So what's nice about Alphabet is that in each one of these tech waves, they've had the human capital to take advantage of it and the strategic position. And as we all know, with generative AI, data is really becomes more valuable, and who has better data than Google? Between YouTube and search, they have data that's second to none with their 3 billion, um, active monthly users. So I actually just think they're really well positioned strategically for the generative AI future.
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