Alphabet set to report Q1 earnings: Here's what to expect

Google (Alphabet) Earnings Preview: A Scary Period for Ad Market

Key Concepts:

• Macroeconomic factors impacting ad spend
• Exposure to China-based marketers
• Supply chain disruptions and embargo effects
• Nominal Gross Domestic Product (GDP) relationship with ad spend
• Antitrust issues
• Artificial Intelligence (AI) and Cloud strengths
• Ad market stabilization and recovery

1. Macroeconomic Concerns and Ad Market Impact:

• Barton Crockett (Rosenblatt Securities) expresses concern about the current macroeconomic environment and its potential impact on the ad market.
• Google, as a major internet ad company, is significantly exposed to China-based marketers, who account for approximately 10% of ad revenue at Meta and a similar percentage in Google search and YouTube.
• The effective embargo on imports of goods from China (excluding smartphones and consumer electronics) raises questions about the decline in ad spend from companies like Shein and others.
• Broader concerns exist regarding potential supply chain disruptions and their impact on ad spending.

2. Google's Guidance and Market Volatility:

• Google doesn't provide specific guidance for the next quarter, but their tonal cues will indicate whether things are improving or weakening.
• The current market volatility makes it challenging to predict ad spend trends accurately.
• Crockett notes the strong relationship between ad spend and nominal GDP. If GDP is pressured, or if key categories like autos (due to supply chain issues) and China (due to embargoes) are affected, Google will feel the impact.

3. Potential for Short-Term Gains Amidst Chaos:

• While chaos could lead to better numbers in the short term for some companies, Crockett believes that in aggregate, ad spend is strongly tied to nominal GDP.
• Marketers might try to look past the volatility, anticipating that the administration will push for trade deals without significantly disrupting the economy before the midterm elections.

4. Investment Strategy and Stock Recommendation:

• Rosenblatt Securities does not recommend owning Google stock leading into the earnings release.
• While acknowledging Google's strengths, including its potential in AI and cloud computing, they maintain a neutral rating.
• The valuation is becoming attractive as the stock price declines.
• The recommendation is to wait and see what happens this quarter before reevaluating the stock.

5. Expectations for Other Tech Companies:

• Google's earnings are expected to provide insights into the performance of other tech companies like Meta and Amazon.
• Google's results will likely reflect similar trends and challenges faced by these companies.

6. Key Quotes:

• "This is a scary period that we're getting into." - Barton Crockett, referring to the macroeconomic environment and its impact on the ad market.
• "...there's a very strong relationship between ad spend and what's happening with nominal gross domestic product." - Barton Crockett, highlighting the connection between economic activity and advertising expenditure.
• "We're not of the mind that you need to own Google into this print." - Barton Crockett, stating their recommendation against holding Google stock before the earnings release.

7. Technical Terms and Concepts:

• Nominal Gross Domestic Product (GDP): The total value of goods and services produced in an economy, measured at current prices.
• Embargo: A government-imposed ban on trade with a specific country or on specific goods.
• Antitrust Issues: Concerns related to monopolies and unfair business practices that restrict competition.
• Artificial Intelligence (AI): The development of computer systems that can perform tasks that typically require human intelligence.

8. Synthesis/Conclusion:

The upcoming Google (Alphabet) earnings report is anticipated with caution due to macroeconomic headwinds, particularly the impact of supply chain disruptions, the embargo on certain Chinese goods, and overall market volatility. While Google possesses strengths in AI and cloud computing, the near-term outlook for ad revenue is uncertain. Rosenblatt Securities recommends a wait-and-see approach, suggesting investors reevaluate after the earnings release. Google's performance is expected to set the tone for other major internet companies like Meta and Amazon.