Earnings Preview | With a market value exceeding $3 trillion, is AI-backed Google still "cheap"?

According to Zhitong Finance APP, the stock price of Google's parent company Alphabet (GOOGL.US) soared to record levels last week, pushing its market value to over $3 trillion. So far this year, the stock has risen about 30%, far exceeding the S&P 500 index (about 12%) and even surpassing most other large tech giants. Against this backdrop, Alphabet will announce its third-quarter earnings report at 10 AM Beijing time on October 30, with high expectations from the market. Analysts predict that driven by a rebound in digital advertising and strong demand for cloud computing, full-year revenue will grow by about 16% in 2025, and profits will increase by about 27%. Specifically for the third quarter, the market generally predicts revenue of about $100 billion and earnings per share of $2.29.

Despite reaching a new high last Friday, Alphabet's stock price experienced a volatile week. On Monday, the stock price briefly hit an intraday high of $257.33, but fell on Tuesday after OpenAI released the "ChatGPT Atlas" web browser, causing panic in the market due to new competition in the AI browser space. The stock rebounded on Wednesday and Thursday, driven by reports of Google's breakthrough quantum computing algorithm and a multi-billion dollar cloud computing agreement with AI startup Anthropic, which will provide up to 1 million Google TPU chips. On Friday, the stock rebounded again, rising over 2% in pre-market trading, erasing mid-week losses.

Focus: AI Cloud and Search Business

The most noteworthy aspect is its investment and products in artificial intelligence. In recent weeks, the company announced it would invest over $24 billion in AI and cloud infrastructure, including a $15 billion investment in building data centers in India (the largest data center project Google has undertaken in India to date) and $9 billion to expand data centers in the United States. The company also launched several new AI-driven products in October, such as the Pixel 10 smartphone equipped with the next-generation Tensor G5 chip and "AI everywhere" software features.

Google's search business benefits from the infusion of artificial intelligence. According to the latest data from StatCounter, Alphabet leads the search field with a market share of 90.4%, followed by Microsoft's Bing with a share of 4.08%. Alphabet has been actively embedding AI, especially in the search field, to enhance user experience and provide better AI capabilities, thereby improving advertising effectiveness. Google's AI search features are driving deeper engagement, with AI models providing advanced reasoning and multimodal responses. Google's search functionality is now equipped on over 300 million devices. The AI overview currently reaches over 2 billion users monthly and is available in 40 languages across more than 200 countries/regions Now, it is driving over 10% query growth globally.

Alphabet is also rapidly developing in the booming cloud computing market. In the highly competitive cloud infrastructure market, Google Cloud has solidified its position as the third-largest provider, competing with Amazon's (AMZN.US) cloud division AWS and Microsoft's (MSFT.US) Azure. The widespread adoption of Google Cloud Platform and Google Workspace is expected to drive growth in the Google Cloud sector.

According to data from Synergy Research Group, the market shares of Google Cloud and Microsoft are continuously expanding, while AWS continues to lead with a market share of 30% in the second quarter of 2025. Alphabet and Microsoft's market shares are 20% and 13%, respectively.

However, Google is facing a capacity shortage issue, and volatility in cloud computing revenue is expected to increase before new capacity comes online in 2025. This is expected to impact Alphabet's upcoming quarterly Google Cloud revenue.

According to a collective assessment by analysts, Google Cloud revenue is expected to reach $14.66 billion, a year-on-year increase of 29.1%. Google advertising revenue is expected to reach $72.45 billion, a year-on-year increase of 10%. The general expectation for Google Search and other business revenue is $55.09 billion, a year-on-year increase of 11.5%.

Bullish Sentiment Soars

Investor sentiment is highly optimistic. Wall Street analysts are raising ratings and target prices, and retail investors are increasingly enthusiastic. As of last Friday, market sentiment for Google on Stocktwits has surged to "extremely bullish," with traders predicting the company will "explode" to new highs.

Many analysts now believe Alphabet has more upside potential. Morgan Stanley recently raised its target price to $270 (overweight). BMO Capital raised its target price to $294, citing Google's "AI leadership" in search and cloud computing. Oppenheimer raised its target price to Wall Street's highest at $300 (about 15-18% above current levels). Stifel raised its target price from $222 to $292, noting improved advertising trends and favorable antitrust outcomes. Bernstein raised its target price from $210 to $260 due to accelerated AI developments. Over 90% of analysts give the stock a buy or equivalent rating, reflecting confidence in Alphabet's growth trajectory.

Valuation Relatively Cheap

Alphabet's surge comes amid a broader tech stock rebound driven by artificial intelligence. Last week, stocks of companies like Apple, Amazon, and Microsoft also rebounded. Overall, in the so-called "AI frenzy," the tech-heavy Nasdaq Composite Index recently reached an all-time high, with large-cap stocks like Alphabet leading the way The artificial intelligence boom has driven up valuations but has also sparked some cautious voices. A recent survey by Bank of America found that 54% of fund managers believe AI stocks are in bubble territory. However, many analysts believe that Alphabet's valuation remains reasonable compared to its peers—with a price-to-earnings ratio of about 20 times, which is a discount compared to some competing tech giants. Google's earnings for 2025 are expected to grow by about 18% compared to 2024, and the company's substantial cash flow (which funds aggressive buybacks) helps support its stock price. An Oppenheimer analyst wrote, "Given the more conservative estimates and lower valuations, we are more optimistic about Alphabet in the short term," noting that Google's stock price is attractive even at historical highs. In short, despite the risks (from regulation to competition), the consensus on Wall Street is that Alphabet's fundamental advantages in search, advertising, and artificial intelligence position it for further growth in both the short and long term.

However, there are risks to Alphabet's upward momentum. Last month, a U.S. judge ruled that Google would not be forced to sell key assets like Chrome or Android in an antitrust case, granting Alphabet significant legal reprieve. Instead, the court implemented milder remedies (such as sharing data with competitors)—avoiding a breakup and alleviating major investor concerns. This favorable ruling caused Alphabet's stock price to rise by about 7% after the news was announced. However, global regulatory pressures remain. The UK's competition regulator has just designated Google's search business as having a special "strategic market position," paving the way for stricter regulation of its approximately 90% market share in search. In the U.S., the Supreme Court allowed an injunction (from a lawsuit by Epic Games) that will force Google to loosen its app store policies by 2026. An antitrust trial against Google's advertising technology business is also ongoing, leaving some regulatory risks still present