Alphabet Q2 Preview: AI Competition And Cloud Growth In Focus

Tiger Newspress
16 Jul

Alphabet is scheduled to report results for the second quarter of 2025 after market close on Wednesday, July 23, 2025.

Alphabet's Q2 revenue is expected to be $93.829 billion, adjusted net income will be $29.165 billion, and adjusted EPS is expected to be $2.437, according to Bloomberg's consistent expectations.

Previous Quarter Review

Alphabet reported first-quarter revenue that exceeded analysts’ expectations, buoyed by growth in its cloud computing unit.

The Google parent generated sales, excluding partner payouts, of $67.6 billion for the three months that ended on March 31, surpassing the $66.1 billion expected on average by analysts, according to data compiled by Bloomberg. Net income was $1.89 per share, compared with Wall Street’s estimate of $1.53 per share.

Google Search Ad Pricing, Cloud to Aid Capex Ramp-Up

Google Search may once again surpass consensus on ad pricing growth, which we believe could be aided by the rollout of AI Overviews and AI Mode on its search page.

Consensus of around 27% in 2Q seems low for Google Cloud gains given the accelerating demand for AI workload deployments and Gemini large-language model use. YouTube ad growth could accelerate with the company adding more LLM capabilities for creators and Performance Max campaigns.

Waymo's steady ramp-up is unlikely to impact its operating profit, which could see some headwind from increased outlays for AI talent such as its acquisition hires from Windsurf and higher depreciation costs tied to AI infrastructure.

Google could raise its full-year capex expectations by 10-15% amid rival Meta's plans to build several gigawatt clusters for its Superintelligence Lab.

AI competition threatens search dominance

The rise of ChatGPT and other AI platforms has created unprecedented challenges for Google's search business. These new competitors offer conversational interfaces that provide intellectual answers to complex questions, potentially reducing users' reliance on traditional search engines and the advertising revenue they generate.

Alphabet's forward 12-month price-to-earnings ratio has compressed from a five-year average of 22.6x to 18.3x, reflecting investor concerns about the company's ability to maintain its search dominance.

To counter these threats, Alphabet has launched Gemini 2.5 Pro, its latest generative AI model. LMArena has ranked it as a leader among AI peers including OpenAI's models and Claude Sonnet 4 across areas like creative writing, coding, and visual processing.

The company has leveraged its vast user base across its products, including Android, to drive AI adoption, with half a billion users now using Gemini models. AI Overview, integrated into Google Search, has reached 1.5 billion monthly users, demonstrating the company's ability to enhance its existing products with AI capabilities.

Investors will be closely watching if Alphabet can continue to expand on the user base of its GenAI model without cannibalising the traditional Search base. This delicate balance between innovation and protecting existing revenue streams will be crucial for the company's long-term success.

Cloud business drives growth ambitions

Google Cloud represents Alphabet's biggest growth opportunity, with the division expected to expand revenue by 26% year-on-year in Q2. The cloud business has been gaining market share from competitors Amazon and Microsoft, improving from 10% in Q1 2023 to 12% in Q1 2025.

Innovation in AI enterprise solutions will be crucial for Google Cloud's continued success. The company's ability to integrate cloud offerings with other Google products like Workspace provides a competitive advantage that rivals find difficult to replicate.

The proposed $32 billion acquisition of Wiz would enhance Google Cloud's security capabilities, addressing a key consideration factor for businesses selecting cloud providers. Enhanced security features are increasingly important as companies migrate sensitive data and applications to cloud environments.

Investors will be watching for management updates on the Wiz acquisition and the company's strategy for further gaining market share. The cloud market remains highly competitive, with significant opportunities for companies that can effectively combine AI capabilities with robust infrastructure.

Anti-trust challenges create regulatory risks

Alphabet faces significant anti-trust challenges across multiple jurisdictions that could fundamentally impact its business model. In the US, the company is defending against allegations of illegally monopolising both the search engine market and online advertising markets.

Court rulings from ongoing remedies trials could have substantial consequences for Google's operations. One proposed remedy involves forcing Google to divest its Chrome browser, which would significantly impact the company's search revenue and user data collection capabilities.

In Europe, the EU's General Court has issued a €4.1 billion fine for exploiting Android's dominance to provide unfair advantages to Google's own apps. While the company continues to appeal, the likelihood of substantial financial penalties remains high.

The outcomes of these legal proceedings will be closely monitored by the market when assessing the company's long-term prospects.

Wall Street Analysts’ Opinion

Wall Street sentiment remains largely positive despite the challenges, with 43 out of 55 analysts maintaining 'buy' or 'strong buy' ratings according to LSEG data. However, the average target price has declined from approximately $215 in March to $202.05, reflecting increased uncertainty. The current analyst consensus suggests potential upside of 11% from recent trading levels.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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