Google parent Alphabet (GOOGL) reports second quarter earnings after the market close on Wednesday, 23 July.

Since its Q1 report, Google has underperformed several peers including Meta, Microsoft and Amazon. Shares trade around 12x forward earnings, a little below their 10yr average. Clearly there is a competitive threat from AI in terms of search, but it looks like ad spending is solid as still see a shift to mobile, whilst Google is at the leading edge of investing in AI leadership.

First quarter numbers showed Google’s search and advertising units are still posting strong growth despite AI competition. The firm reported revenue of $90.23 billion and earnings per share of $2.81 in the first quarter. A 5.7% implied move shows the market is bracing for meaningful surprises—up or down. Here's a delve into what's expected.

Ad Spend

Easier comparisons with Q2 last year mean Alphabet looks well set up heading into this report, with ad checks indicating a better-than-forecast second quarter report card tariff worries have abated somewhat and we could see key players like Temu and Shein dialling up spend. Remember that on the Q1 earnings call management noted that changes to de minimis exemption were expected to create slight headwinds in advertising revenue. On the other hand, we still face lots of macro uncertainty and second half ad budgets could be pressured.

The comparison versus Q2 last year appears easier with Q2 2024 at +11% from +13% in Q1 2024, implying the Q2 comp for 2025 is easier by 1-8 percentage points according to broker Jefferies. 

The feeling on the Street is that Q2 saw a pickup in ad spending with YouTube tracking well, but the second half is a bit cloudier and budgets could be constrained - watch for a negative sentiment on the guide if that is the case.

Cloud

Cloud growth is expected to benefit from broad industry tailwinds - although Google Cloud is way behind Amazon and Microsoft, there are signs of a momentum shift. Jefferies suggests Google Cloud could be the “next breakout play” for the shares.

Indeed, only last week OpenAI said it would tap Google’s cloud platform for its ChatGPT service. The AI pioneer will use the Google Cloud Platform, as well as Microsoft, CoreWeave and Oracle.

The Cloud business saw a particularly strong first quarter with revenues up 28% on strong AI-led demand and can likely sustain this momentum in Q2.

AI and Regulatory scrutiny

Concerns over AI’s impact on Search and regulatory scrutiny have weighed on the stock. AI is the big disruptor for Google on two fronts: one it’s upending advertising, two it’s upending search. However, this may already be discounted in the price according to Truist analyst Youssef Squali.  Google still seems well placed to dominate the AI Search battle given its incumbency and investments in the space. 

There’s also been worries around antitrust cases so investors will also want clarity following the Department of Justice’s review of the firm’s competitive practices.

Waymo

Waymo is quietly getting on with beating Tesla (which also reports on Wednesday). It may be an underappreciated part of the business.  Last week it revealed it had completed 100 million fully autonomous miles as it accelerates its expansion.

Analyst View

Morgan Stanley recently raised its price target on Alphabet to $205 from $185, citing the company’s improved innovation and turning AI into its products. Jefferies has a base case price target of $210, with a bull thesis expanding to $255 and bear thesis at $125.

Q1 Recap

• Consolidated Alphabet revenues in Q1 2025 increased 12%, or 14% in constant currency, year over year to $90.2 billion reflecting robust momentum across the business, with Google Search & other, YouTube ads, Google subscriptions, platforms, and devices, and Google Cloud each delivering double-digit growth rates. 

• Google Services revenues increased 10% to $77.3 billion, reflecting strong performance across Google Search & other, Google subscriptions, platforms, and devices, and YouTube ads. 

• Google Cloud revenues increased 28% to $12.3 billion, led by growth in Google Cloud Platform (GCP) across core GCP products, AI Infrastructure, and Generative AI Solutions. 

• Total operating income increased 20% and operating margin expanded by 2 percentage points to 34%. 

• Net income increased 46% and EPS increased 49% to $2.81. 

• The company announced a 5% increase to the dividend, resulting in a quarterly cash dividend of $0.21

 Q2 Expectations 

• For Q2 2025, revenue is projected to rise 10.7% YoY r to $93.8 billion.

• Net income is expected to decline from last quarter to $26.5 billion, but YoY +12.2%. 

• EPS is seen rising to $2.18 from $1.89 a year before

• Operating margin is seen rising from 32.4% to 34.1%.

 Catalysts (Jefferies)

• Rising importance of YouTube in a video-first world

• Emergence of Google Cloud as a formidable competitor in the public cloud

• Platform positioning of Google Assistant and AI across multiple products, providing a coherent long-term strategy to defend dominant position in core search

• Increasing disclosures for YouTube, Google Cloud, Waymo

• Ad industry data points on shape of spend trends due to macro cycles