Bank of America Merrill Lynch's outlook on Alphabet Inc. Class C (GOOGL.US) Q3 earnings: Search business may exceed expectations, AI business shows positive momentum, target price raised to $280.

Alphabet Inc. Class C (GOOGL.US) will announce its third-quarter performance on October 29th. Bank of America Corp has released a research report, reaffirming its "buy" rating for Alphabet Inc. Class C and raising its target price from $252 to $280. Bank of America expects revenue to grow significantly, with one-time expenses possibly impacting earnings per share. Advertising spending in the third quarter is expected to exceed expectations, benefiting from macroeconomic improvement, increased data usage, and increased advertising spending to offset the decline in organic search traffic. Bank of America has raised its revenue expectations above market expectations, including $390 million in legal expenses; it expects third-quarter revenue and earnings per share to be $86 billion and $2.17, respectively, while the market expects $85 billion and $2.29 respectively. The market expects search to grow by 11%, while Bank of America expects 12%. Bank of America estimates third-quarter operating expenses to be $29.6 billion, with operating profit margin declining 259 basis points to 35.7% year-over-year (but improving year-over-year excluding one-time legal expenses). The outlook for the fourth quarter and the performance of the third quarter compared to key data from Meta/Microsoft Corporation will be crucial for stock performance. Due to better-than-expected expectations for the third quarter, comparisons with Meta/Microsoft Corporation (which will report on the same day) and comments on the fourth quarter could impact recent stock performance. For the third quarter, Bank of America expects an advertising growth rate of 11% (compared to 23% for Meta), and a cloud business growth rate of 32% (38% for Azure). For the fourth quarter, Bank of America expects revenue and earnings per share to be $93.8 billion and $2.59, higher than market expectations of $92.7 billion and $2.55, and believes that if third-quarter performance exceeds expectations, market expectations for the fourth quarter may be revised upwards. For the fourth quarter, Bank of America's estimate assumes a 12% search growth rate, a YouTube growth rate of 12% (down 1 percentage point), and slightly more challenging year-over-year comparisons. Potential positives and risks for the third-quarter conference call include: 1) rising expectations for advertising growth (favorable macroeconomic environment, artificial intelligence technology + data usage), 2) GCP trends relatively robust compared to Azure (new customers leading to backlog growth), 3) strong search metrics indicating strong performance through artificial intelligence transformation, and 4) efficiency gains from artificial intelligence driving core profit margin growth. Risks include: 1) search business meeting or falling below expectations, 2) slowing growth in paid clicks, 3) advertising growth rate lower than Meta, 4) comments indicating uncertainty or higher capital expenditures and future financial expenses in the fourth quarter, and 5) the impact of one-time expenses. Bank of America expects positive trends in artificial intelligence performance and cloud demand. Bank of America expects Alphabet Inc. Class C to achieve another quarter of strong search results (as well as stable growth in paid clicks), while the impact of macroeconomic factors may further mitigate the risks of artificial intelligence and help expand multiple businesses. Additionally, management is expected to emphasize the recent strong momentum in Gemini. In terms of cloud business, recent transactions may contribute to backlog growth, and Bank of America remains optimistic about the increasing value contribution in this area. Given the overall market expansion, Bank of America has raised its target price to $280.