TLDR
- BofA analyst Justin Post raised Alphabet’s price target to $280 from $252, implying 11% upside, ahead of Q3 earnings on October 29
- Post forecasts Q3 revenue of $86 billion, above Wall Street’s $85 billion estimate, with EPS of $2.17 including legal charges
- Google’s core advertising business remains strong with improved spending trends across key categories offsetting slower organic search visits
- Google Cloud revenue grew 32% year-over-year in Q2 with operating margins improving from 11% to 21%
- Alphabet stock has surged over 30% since Q2 earnings report on July 23, crossing $3 trillion valuation for the first time
Alphabet is set to report third-quarter earnings on October 29. BofA Securities analyst Justin Post increased his price target on the stock to $280 from $252 while maintaining a Buy rating.
Post raised his Q3 revenue estimate to $86 billion, topping Wall Street’s $85 billion forecast. He expects earnings per share of $2.17, slightly below consensus due to approximately $3.9 billion in legal charges.
Excluding those charges, Post projects operating margins will hold near 35.7%. This demonstrates the company’s solid cost control capabilities.
Advertising Business Holds Strong
The analyst believes Alphabet’s core advertising business continues to perform well. Third-quarter spending trends have improved across key categories.
This strength should help offset a slowdown in organic search visits. Google Search revenue has been growing at a 12% pace despite concerns about generative AI competition.
Google has integrated AI search overviews into every search query. This creates a hybrid experience combining traditional and AI-powered search results.
Management has stated that AI search overviews generate about the same monetization as standard searches. This means the company isn’t losing revenue on the transition.
Post said Alphabet should deliver another strong quarter for search with steady paid click growth. This performance suggests AI tools aren’t yet hurting search revenue.
The analyst believes this may help reduce investor concerns about AI competition. He expects management to highlight growing adoption of Gemini, Alphabet’s main AI model, across its products.
Cloud Computing Momentum Builds
Google Cloud has become a bright spot for the company. The division’s revenue jumped 32% year-over-year in the second quarter.
Operating margins have improved dramatically from 11% last year to 21% this year. Post remains optimistic about Google Cloud’s prospects.
Recent customer wins could boost the division’s backlog and support profit growth. Google Cloud has secured business from OpenAI and Meta Platforms.
The stock has surged more than 30% since reporting Q2 earnings on July 23. Alphabet recently crossed the $3 trillion valuation mark for the first time.
The company is currently the fourth-largest in the world by market cap. A judge’s decision not to seek a breakup of Alphabet’s core business helped fuel the rally.
Alphabet still trades at a discount compared to its big tech peers on a forward price-to-earnings basis. The company generates the most net income among major tech firms.
This gives Alphabet flexibility for future investments in stock buybacks, AI development, or potential acquisitions. The stock carries a consensus Strong Buy rating from 38 Wall Street analysts.
That rating includes 30 Buy and eight Hold recommendations assigned in the last three months. The average price target of $258.81 implies 2.18% upside from current levels.
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