GOOGL

Alphabet Q1 earnings preview: why Thursday could define Google's future

Jacob Falkencrone

Global Head of Investment Strategy

Key points:

  • Alphabet faces a critical test this quarter, as investors closely watch how effectively it defends its core search business against rising AI competition from companies like OpenAI.
  • Google Cloud's growth is strong, but investors need clarity on solving current capacity constraints and turning revenue growth into consistent profits.
  • Management's guidance will be crucial: investors should focus on Alphabet’s tone regarding AI strategy, economic resilience amid tariffs, and disciplined cost control as indicators of long-term confidence.

 

Alphabet’s upcoming earnings report this Thursday is a critical moment for investors. Amid rising tensions from AI disruption, tariff uncertainties, and market volatility, Alphabet finds itself at a defining crossroads. Investors are rightly asking: Will Alphabet stand tall or wobble under pressure?

The numbers

With Alphabet’s stock down 22% from recent highs, it's clear that investors are uneasy. Yet underneath the anxiety, Alphabet remains a financial powerhouse, on track to report USD 75.4 billion in revenue for the first quarter of 2025—a solid 11.5% annual growth rate—and earnings per share expected at USD 2.01, marking about 6% year-over-year growth. But beyond these numbers, investors must carefully gauge what Alphabet says—and just as importantly, what it doesn't.

Is Alphabet's fortress under siege?

Investors have always loved Alphabet’s core business—Google Search—because it seemed unbeatable, like a fortress with unscalable walls. But the rapid rise of OpenAI’s ChatGPT, Perplexity and other AI tools has suddenly made Google look vulnerable. Google still dominates search revenues, pulling in USD 54 billion last quarter alone, but ChatGPT, with around 800 million users and blistering innovation pace, has investors worried.

To put it metaphorically: Alphabet is like an ageing football champion—undisputed for a decade—now suddenly competing against an aggressive upcoming rival. The crowd (investors) are nervous. Alphabet management’s commentary on Thursday about how they're defending their territory through AI, especially with their own Gemini AI models, will either reassure or deepen investor concerns.

The AI revolution isn’t a sprint; it's a marathon. The winner will be the one best able to scale innovation into lasting profit. Alphabet isn't out of this race—but they need to prove they’re setting the right pace.

Google Cloud: Alphabet’s secret weapon or Achilles heel?

Away from the spotlight of search, Google Cloud is expanding impressively, growing revenues about 30% annually and nearing a $50 billion annual run-rate—driven by booming AI demand.

Yet recent moves by cloud leaders Amazon and Microsoft to pause or delay new data centre leases—citing economic concerns and potential oversupply—are flashing warning signals across the industry. This cautious shift suggests rising uncertainty about near-term cloud growth and profitability.

For Alphabet, this is a double-edged sword. A broader industry slowdown would threaten Google's ambitious cloud growth plans. However, if Alphabet presses ahead while competitors ease off, Google Cloud might gain valuable market share longer term.

Investors should carefully listen for management's guidance on Thursday: Will Alphabet tap the brakes on spending, or stay aggressive and risk higher short-term costs to seize potential long-term gains?

Tariffs and turmoil: navigating the stormy macro climate

While Alphabet may not seem directly exposed to US-China tariffs, indirect effects could be substantial. Tariff-driven consumer weakness in global markets could crimp advertising revenues, particularly from Asia. Alphabet has traditionally weathered economic storms effectively, but this year might be different.

Investors need Alphabet management to address head-on how they're protecting profits from macro pressures. Are they confident enough to steer through the storm, or are they bracing for impact?

As I've reflected before: "Companies can't control the economic weather—but investors need reassurance they're equipped to navigate rough seas."

The guidance game: what will management say?

When Alphabet reports, it won't be just about past performance. The real story will be guidance for the future:

  • Search and AI integration: Is Alphabet successfully leveraging AI, or just playing defence?
  • Cloud profitability: How quickly will cloud growth translate into substantial profits?
  • Cost discipline: Alphabet’s ambitious AI investments are costly. Investors need clear indications these investments will pay off.

Management’s tone here will be crucial. Investors will hang on every word, looking for signals of confidence—or hints of caution.

Three crucial things investors need to watch

Here are three simple, clear things you should watch for Thursday:

  1. AI clarity: Listen closely for Alphabet’s strategic moves around AI integration. If Alphabet convincingly positions itself as a leading player in AI-driven search and cloud, investor fears should ease considerably.
  2. Economic resilience: Alphabet should clearly outline how it's managing macroeconomic headwinds and tariffs. Strong management commentary here would be a reassuring signal.
  3. Long-term confidence: Regardless of short-term volatility, Alphabet remains a robust business with immense resources. If the long-term fundamentals remain intact, periods of uncertainty might represent buying opportunities for patient investors.

Looking ahead: Alphabet's moment of truth

Alphabet faces genuine challenges—but challenges create opportunity. The Thursday earnings call will reveal whether Alphabet is reacting to these challenges or proactively shaping the future. For investors, this moment is like peering through a telescope: are you looking at a distant star fading slowly or at one whose light will shine brighter after this period of uncertainty?

Investing isn't about avoiding uncertainty—it's about managing it intelligently. Alphabet’s Q1 earnings report offers investors precisely that opportunity. So, stay alert this Thursday. The story Alphabet tells could set the course—not just for the next quarter—but perhaps for years to come.

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