Should You Buy, Hold, or Sell Alphabet Stock Ahead of Q1 Earnings?

After Thursday’s market close, Alphabet Inc. GOOGL will announce first-quarter earnings results. The company stands to benefit from artificial intelligence (AI) growth and seems undervalued. Should you buy now or await the earnings update? Let’s find out –  

Alphabet’s Q1 Earnings Will Benefit From AI 

So far this year, Alphabet’s shares have plunged 20% as the broader market reeled under tariff pressure and the Google parent lagged behind its competitors in the AI race. However, the company’s revenues and earnings are expected to improve in the first quarter as Alphabet continues implementing AI into its applications like cloud infrastructure, workplace collaboration tools and search engine. 

The Google Gemini AI is utilized across Alphabet’s various platforms and products, reaching over 2 billion users. Samsung’s smartphone AI assistant is Gemini, and the company aims to reach 500 million Gemini users by the year-end with support from its partnership with Samsung. Additionally, Alphabet will launch an ad-supported version of Gemini to boost ad revenues. 

Despite holding a strong position in the search engine market, CEO Sundar Pichai aims to enhance search volumes through its Circle to Search feature, which is now on 200 million Android devices. Meanwhile, an anticipated high demand for AI cloud services will boost Google Cloud revenues in the first quarter. 

However, it’s not just in the first quarter; Google Cloud revenues are expected to sustain strong growth due to increasing demand for cloud-based AI services, which are projected to grow 30% annually until 2032. Nonetheless, Alphabet is forecasted to have a robust first quarter attributable to AI, with revenues projected at $75.53 billion (up 11.7% from the previous year) and earnings per share (EPS) expected at $2.01 (exceeding $1.89 from last year).  

Also, Alphabet has, on average, delivered a positive trailing four-quarter earnings surprise of 11.6%, hinting at potential first-quarter earnings growth. (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.) 

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Alphabet Faces Challenges From Tariffs and Weak Ad Business 

The Trump administration’s tariffs, initiated in April, may not affect Alphabet’s first-quarter earnings but can have a lasting, near-term impact. While software is typically tariff-immune, companies facing tariffs may trim costs by reducing spending on AI and cybersecurity tools, potentially impacting Alphabet’s AI services revenues. 

The rise of large language models (LLMs) like ChatGPT could lead to a decrease in demand for YouTube and Google, impacting Alphabet’s ad revenues. Additionally, Amazon.com, Inc. AMZN, entering the advertising market through partnerships with Snap Inc. SNAP and Pinterest, Inc. PINS may disrupt Alphabet’s ad business growth. 

Here’s How to Trade Alphabet Stock Before Q1 Earnings 

Expect strong first-quarter earnings from Alphabet with gains fueled by AI tools and platform improvements, encouraging stakeholders to retain Alphabet stock.  

Furthermore, Alphabet appears to be a better bargain than its peers, prompting consideration for new investments in the stock. Per the price-to-earnings (P/E) ratio, Alphabet presently trades at 17.39 times forward earnings. The Internet - Services industry’s forward earnings multiple, on the other hand, is 17.72.   

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However, new entrants should be cautious despite the present cheap valuation, as increasing competition in the ad business and tariff issues could impede Alphabet’s long-term growth. It is advisable to wait for earnings call updates before purchasing Alphabet stock. For now, Alphabet has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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