Google investors high hopes after stock’s sharpest rally in 20 years

Alphabet There’s a high bar to clear when it reports earnings on Wednesday.

The company’s stock price rose 38% in the third quarter, marking its best quarterly performance in two decades. It has continued to recover, rising 11% so far in October and closing at a record high on Monday.

Investors have readjusted their expectations after seeing faster growth in the years before the 2022 slowdown, as revenue growth has recently remained in the low teens and is expected to reach 12% next year. Much of the recent optimism centers around Google’s advanced position in the artificial intelligence race.

But the biggest catalyst for the stock in the third quarter had more to do with Google’s relative weakness in artificial intelligence than its position in online advertising.

Alphabet shares rose in early September when Google avoided the worst-case scenario in its search antitrust case. Following the government’s victory in its lawsuit against the company last year, U.S. District Judge Amit Mehta ruled last month that Google would not have to sell its Chrome browser but would have to share data with rivals.

Mehta said the rise in artificial intelligence services from companies like OpenAI is creating a lot of new competition in the search space. Last week, OpenAI backed this idea by introducing ChatGPT Atlas, an AI-powered browser that could directly challenge Chrome.

While investors were quick to applaud Mehta’s decision, Google now needs to show that it is a force in artificial intelligence, which serves as the tech industry’s growth engine. Google’s cloud unit is benefiting from the AI ​​boom as companies rely on technology to run large language models and expand workloads. Google is investing heavily in its Gemini family of AI models, products and services.

Analysts at KeyBanc Capital Markets raised their price target on Alphabet to $300 from $265 over the weekend, expecting third-quarter results to “show faster product velocity driving momentum across its autonomous vehicle businesses Search, Cloud and Waymo.”

The stock’s pop was driven by “a combination of a more positive-than-expected DOJ Search solutions trial and more signs of progress on AI across business units,” analysts wrote.

Alphabet, along with its rivals, are scheduled to announce results after the bell on Wednesday Microsoft And Meta. Apple And Amazon Report the next day.

Wall Street expects revenue growth of 13% to $99.89 billion and earnings per share of $2.26, according to LSEG.

When it comes to Google’s position on artificial intelligence, some analysts see cause for concern.

Bernstein analysts wrote last month after the remedy decision that Mehta’s comments about generative AI competing with search could be a red flag for investors.

“The bite is not fatal, but it still hurts,” wrote analysts at Alphabet, which has the equivalent of a hold rating.

Mehta wrote about 30 pages of the 226-page file. We explain generative AI and the current state of the market. He called the space “highly competitive” and wrote that there were “lots of new entrants to the market” with access to “lots of capital.”

ChatGPT accounts for approximately 81% of the global AI chatbot market, according to September data. Stat Counter. The company stated that Perplexity ranked second with 11%, followed by Microsoft Copilot with 4.1% and Gemini with 2.8%.

But Google is aggressively pushing Gemini as much more than a ChatGPT competitor, leveraging its strength in various markets for distribution.

Earlier this month, the company launched Gemini Enterprise, targeting enterprise customers with agents who perform specific job duties. In September, Google announced that it would make Gemini available in Chrome to mobile devices as well as to Mac and Windows users in the US; so users can ask Gemini for help understanding the content of a specific web page, work across tabs, or do more, like schedule a meeting or search for a YouTube video, all in a single tab.

Google CEO Sundar Pichai said this month: Salesforce At the Dreamforce conference, it was announced that Gemini 3, the latest version of the company’s artificial intelligence model, will be released this year.

Analysts at Mizuho said in a report on the internet market last week that in more than 100 recent calls with investors, “competitive risks from OpenAI on the internet, particularly Google, are the No. 1 topic.”

Still, they said they see “competitive fears are likely to diminish as we refocus on earnings fundamentals.” “The upcoming launch of Gemini 3 could further shift sentiment towards Alphabet shares toward the AI ​​winner, at least in the near term,” they wrote of Google.

Although the resolution decision is generally welcomed by investors, the company will have to make some concessions according to the judge’s decision. Most importantly, Google must make certain search data and user data available to “qualified competitors.”

It will be up to the technical oversight committee to determine which companies will fall into this category at a date yet to be announced.

Services like DuckDuckGo and Microsoft Bing could be among the beneficiaries, potentially gaining better access to some of Google’s search index data under certain licensing arrangements.

Mehta wrote that data sharing solutions “can help close the huge advantage Google has in answering long-tail queries, thereby improving product quality and attractiveness to new users.”

Baird analysts wrote that they expect a “modest” impact on Google because the company doesn’t have to share its data with prolific AI rivals like Perplexity and OpenAI. This would be “more problematic,” Baird analysts wrote.

Google, which plans to appeal the decision, declined to comment but previous blog post upon the judge’s decision.

“We are concerned about how these requirements will impact our users and their privacy, and we are reviewing the decision closely,” the company wrote.

Abiel Garcia, a former assistant attorney general for the California Department of Justice who works in antitrust, said he sees no impact of the ruling on how Google operates.

“Maybe some of the data could help competitors’ products around, but I don’t think it’s really going to change anything,” Garcia, now a partner at Kesselman, Brantly & Stockinge, told CNBC. “This almost encourages Google’s dice-rolling behavior.”

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