AI is the word as Alphabet and Meta get ready for earnings – MarketWatch

AI is the dominant storyline make that only storyline as two of Big Techs biggest players prepare to announce quarterly results next week.

While Alphabet Inc.s GOOGL GOOG Google reportedly races to develop a new search engine powered by AI, Meta Platforms Inc. META is changing its sales pitch to advertisers from a focus on the metaverse to artificial intelligence to drum up short-term revenue. Meta is expected to make an announcement around its plans next month.

With advertising sales their primary source of revenue in a funk, both companies are scrambling to shore up sales through the promise of AI. Brace for a long ad winter that may well persist until the second half of 2023, Evercore ISI analyst Mark Mahaney said in a note last week.

Metas annual advertising revenue is expected to reach $51.35 billion in 2023, up 2.7% from $50 billion from 2022. It is forecast to grow 8% to $55.5 billion in 2024, according to market researcher Insider Intelligence. Facebooks parent company is expected to announce its latest round of layoffs on Wednesday.

Google, by comparison, is expected to haul in $71.5 billion in 2023, up 2.9% from $69.5 billion in 2022. Ad sales are expected to increase 6.2% to $75.92 billion in 2024. Like Meta, Google is rumored to be planning more layoffs soon.

AI is the hot thing. And Meta is playing down the metaverse [which inspired its corporate name change] for now in favor of AI with advertisers, Evelyn Mitchell, senior analyst at Insider Intelligence, told MarketWatch. It is a solid strategy during an unprecedented year of economic uncertainty after years of astronomical growth in tech.

Against a slowdown in ad sales, tech executives have incessantly hyped the promise of AI this year during earnings calls. Mentions of artificial intelligence soared 75% even as the number of companies referencing the technology has barely budged, according to a MarketWatch analysis of AlphaSense/Sentieo transcript data for companies worth at least $5 billion. They pointed to the operational efficiency of AI and its potential as a short-term revenue producer.

AI is the most profound technology we are working on today, Alphabet Chief Executive Sundar Pichai said during the companys last earnings call in January, according to a transcript provided by AlphaSense/Sentieo.

Read more: Tech execs didnt just start talking about AI but they are talking about it a lot more

Googles AI pivot is primarily motivated by the potential loss of Samsung Electronics Co. 005930 as a default-search-engine customer to rival Microsoft Corp.s MSFT Bing. Google stands to lose up to $3 billion in annual sales if Samsung bolts, though the South Korean company has yet to make a final decision, according to a New York Times report. An additional $20 billion is tied to a similar Apple Inc. AAPL

This is going to impact every product across every company, Pichai said about AI in a 60 Minutes interview that aired Sunday night.

Soft ad sales in a wobbly economy dinged the revenue and stock of social-media companies in the previous quarter, prompting tens of thousands of layoffs. In addition to Meta and Google, Twitter Inc. and Snap Inc. SNAP suffered ad declines in the fourth quarter of 2022.

Cowen analyst John Blackledge says a first-quarter call with digital ad experts this month suggests continued pricing weakness for Meta, with Google in better shape on the strength of its dominant search engine. He expects Meta to report ad revenue of $27.3 billion for the quarter, up 1% from the year-ago quarter and up 4.2% from the previous quarter. Snap, which is forecast to report a revenue drop of 6% when it reports next week, recently launched an AI chatbotas well.

For now, however, substantial AI sales for Snap and Meta are a few quarters away, leaving analysts to focus on the impact of recent cost-cutting efforts.

Meta is making heroic efforts to improve its cost structure and optimize organizational efficiency, Monness Crespi Hardt analyst Brian White said in a note on Monday. In the long run, we believe Meta will benefit from the digital ad trend, innovate in AI, and capitalize on the metaverse.

Analysts in general are forecasting respectable though not superb results from the two biggest players in the digital advertising market.

For Google, analysts surveyed by FactSet expect on average net earnings of $1.08 a share on revenue of $68.9 billion and ex-TAC, or traffic-acquisition cost, revenue of $57.07 billion. Analysts surveyed by FactSet forecast average net earnings for Meta of $2.01 a share on revenue of $27.6 billion.

In [the first quarter], advertisers fear, uncertainty and doubt were exacerbated by the sudden bank failures, Forrester senior analyst Nikhil Lai told MarketWatch. Nonetheless, the strength of Googles Cloud business offsets weak ad sales, like Metas year of efficiency diverts attention from declining ad spend.

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AI is the word as Alphabet and Meta get ready for earnings - MarketWatch

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