By Zaheer Kachwala and Deborah Mary Sophia
(Reuters) - Alphabet (NASDAQ:GOOGL) will likely post its slowest revenue growth in four quarters on Tuesday, hurt by competition that weighed on its core Google Search business and dented YouTube ad spending.
The slowdown in its core business is expected to overshadow AI-driven gains at its cloud-computing business in the third quarter. This quarter was also the company's first since Anat Ashkenazi took over as finance chief from Ruth Porat.
Alphabet's long-established dominance of the digital ad market is under threat from the likes of Amazon (NASDAQ:AMZN) and TikTok that have become popular with advertisers looking to tap a ready pool of buyers.
The other risk Alphabet faces is from regulators who are considering breaking up Google to loosen what they call its "illegal monopoly" on online search.
Analysts expect Google Search and other related revenue to grow 11.6% in the third quarter, slower than the 13.8% increase in the second quarter, according to Visible Alpha.
"New entrants like Perplexity and ChatGPT are raising billions of dollars on the premise that search can now be disrupted; Google has been seen as slow, unprepared ... to the development of GenAI," MoffettNathanson analysts said.
"Some of this negative narrative will be hard to disprove in the coming year," the analysts said, adding that they expect significant changes in Google's ability to maintain its exclusive search advantage on Apple (NASDAQ:AAPL) and Android phones in the United States.
In a report earlier this month that raised alarm bells among investors, research firm eMarketer said Google's share of U.S. search advertising revenue was set to fall below 50% next year for the first time in at least 18 years.
Amazon's search advertising revenue share in the U.S. is expected to grow to 24% next year, while generative AI rivals such as Amazon founder Jeff Bezos-backed Perplexity AI are also snatching some ad dollars from Google.
Google is working to improve the effectiveness of its tools. It has started showing ads in the AI-generated summaries it has begun placing at the top of search results, a move that analysts believe may help stave off competition.
Alphabet's shares fell nearly 9% in the three months to September, marking their largest quarterly drop since the third quarter of 2022. But they have risen 17% so far this year.
Overall, Alphabet's revenue is expected to have increased 12.6% in the third quarter to $86.31 billion, slower than the 13.6% growth in the second quarter, according to analysts' estimates compiled by LSEG.
YouTube is also expected to have suffered from some marketers shifting spending to ad-supported tiers of streaming services such as Netflix (NASDAQ:NFLX) and Amazon Prime Video. YouTube revenue likely rose 11.5%, compared with a 13% increase in the second quarter.
Despite the deceleration, analysts from Truist expect YouTube, especially YouTube TV, to have benefited from a boost in political ad spending in the third quarter.
Google Cloud, a bright spot, is set to record faster growth of 29.2%, the biggest jump in seven quarters, as customers increased their spending on its AI services, including the Vertex (NASDAQ:VRTX) AI platform that allows businesses to use the company's models as well as develop their own custom models.
Alphabet warned in July that capital expenses would remain high this year as it invested in AI to keep up with rivals.
Google's cloud peers have also flagged higher capital expenditures as they too rush to enhance their offerings with AI. Amazon's cloud business revenue likely rose 19.3% in the September quarter, while revenue from Microsoft (NASDAQ:MSFT)'s cloud unit is expected to have risen around 11%.
Investors will look for what Chief Financial Officer Ashkenazi does to keep other costs in check.
BofA analysts said with her appointment, there was "potential for the company to 'surprise' with further self-help cost cutting actions after limited layoffs in 2024."