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Mizuho Sees Hidden Upside in Alphabet's Cloud Growth
29 Oct
Summary
- Alphabet stock fell significantly after mixed third-quarter results.
- Cloud revenue surged 103%, with improving margins driven by TPUs.
- Search revenue growth missed estimates due to AI monetization lags.
Alphabet's shares saw a notable drop in premarket trading following the company's third-quarter earnings report, which presented a mixed financial picture. The tech giant's stock was down approximately 11% ahead of the market open.
Mizuho reiterated an 'Outperform' rating with a $460 price target, advising investors to "buy the after-hours pullback." Analyst Lloyd Walmsley highlighted that while search revenue growth, excluding currency effects, fell short of expectations at 12% against Mizuho's 13% estimate, the cloud segment's performance was exceptionally strong.
Cloud revenue experienced a significant increase of 103%, propelled by core demand and scaling TPU revenue. Furthermore, cloud margins expanded to 36.2%, indicating that TPU margins are approaching core cloud margins, which is considerably above previous estimates. This robust cloud performance, analysts believe, offers significant upside to consolidated operating income and GAAP EPS by fiscal year 2028.
Despite the positive outlook for the cloud division, search revenue faced headwinds, with AI Mode monetization lagging traditional search. However, query growth reached its highest point in five years, and AI Mode usage is largely incremental, suggesting this may be the final downward adjustment for search estimates. Mizuho anticipates substantial upside to the Street's Cloud segment EBIT.
The company also noted that TPU racks are sold to Broadcom, which then distributes them to customers. Looking ahead, Mizuho flagged potential margin pressures for Alphabet heading into 2027, citing anticipated higher depreciation and capacity costs for its cloud operations.
