Google’s parent
Alphabet
was climbing Wednesday while social-media platform Snap tumbled after both reported earnings. Although a recovery in advertising is under way, differing scale and capabilities in artificial intelligence are likely to dictate the winners.
Alphabet’s
(ticker: GOOGL) reported more revenue growth than expected for Search and YouTube for the second quarter. Analysts are positive that it can continue to gain from a recovery in advertising spending.
Truist’s Youssef Squali pointed to the company’s implementation of Performance Max, a program that AI to determine where ads should run across Google’s properties.
“We expect this will be instrumental in improving ROI [return on investment] for advertisers, and believe we are just scratching the surface in terms of seeing how AI can transform businesses,” Squali wrote in a research note.
He raised his target price on Alphabet stock to $160 from $122 previously, rating it at Buy. The new target is based on a price-to-earnings multiple of 23 times for 2024, while the previous calltarget was based on projected 2023 earnings.
Alphabet was up 6.5% in premarket trading at $130.20.
Other analysts are looking approvingly at Google’s growing range of formats, including YouTube Shorts, its short-form video service.
“Looking ahead, YouTube Shorts now reaches 2 billion logged-in users every month (up from 1.5 billion last year), and brand advertisers are beginning to test ads. Overall, we continue to see ample room for Google to ramp ad revenue,” KeyBanc’s Justin Patterson wrote in a research note.
Patterson raised his target price on Alphabet to $145 from $140 previously and reiterated an Overweight rating on the stock. The KeyBanc target price for Alphabet is based on a price-to-earnings ratio of 21.5 times for 2024, which Patterson noted is below its five-year median of 24.6 times.
The picture is less rosy for
Snap
(SNAP), which issued a third-quarter revenue forecast that disappointed the market. KeyBanc’s Patterson said that while the company’s number of active advertisers increased by 20% in the second quarter from the year earlier, large advertisers still seem to be staying away.
“With larger companies ahead in measurement, AI capabilities, and budgets, we are incrementally cautious on the duration of this investment cycle to win back advertiser budgets,” Patterson wrote.
Snap could also be about to face competition from Alphabet in the augmented-reality business. Patterson noted Alphabet has cited its generative AI tools allowing users to virtually try on clothing and other items as an advertising opportunity, taking on similar products from Snap.
Patterson kept a Sector Weight rating on Snap stock, with no target price.
Snap is experimenting with AI itself, including introducing a chatbot, which could be an attractive way for advertisers to reach its users.
However, Truist’s Squali said Snap is continuing to lose ground against video platforms such as YouTube Shorts and TikTok, which likely command higher advertising spending given their larger user bases and stronger consumer engagement.
Squali raised his target price on Snap to $11 from $7 after rolling forward estimates to 2024. The stock was down 17% in premarket trading at $10.34, having risen 40% this year as of Tuesday’s close.
Write to Adam Clark at [email protected]
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