Alphabet shares dipped slightly in early Wednesday trading, mirroring a broader decline in megacap tech stocks, despite an optimistic forecast from a key Wall Street analyst ahead of the company’s second-quarter earnings report next week.

The Google (NASDAQ:GOOGL) parent company has been a standout performer among the Magnificent 7 stocks this year, gaining over $520 billion in market value. Investors are optimistic about Alphabet’s advancements in artificial intelligence technologies, coupled with its enduring leadership in search and advertising, which they believe will solidify its position in the evolving global tech landscape.

This week, Alphabet showcased some of its recently gained strength as it reportedly entered advanced negotiations to acquire cybersecurity startup Wiz for approximately $23 billion. This potential acquisition would be the company’s largest ever and a bold move under CEO Sundar Pichai, challenging current U.S. tech regulations.

Meanwhile, separate reports indicate that Pichai halted early discussions with online marketing software group HubSpot, which could have valued the Boston-based company at around $25 billion.

BMO Capital Markets’ Positive Outlook on Google

Analysts at BMO Capital Markets emphasize Google’s longstanding dominance in online search, bolstered by the launch of its AI-powered Gemini chatbot. They believe this will provide a significant near-term boost for Alphabet’s stock as it approaches its Q2 earnings report.

BMO analysts project that Google’s search operations will generate around $197 billion in revenue this year, with expectations for this figure to rise to $217 billion by 2025.

“Search share has increased by 1.3 percentage points in the U.S. and 3.1 percentage points globally over the past year, driven by repeat query behavior and the integration of chatbots in various apps,” the investment bank stated in a note. The analysts raised their price target for Alphabet by $7 to $222 per share.

“Consequently, we are raising our second-quarter search estimate to a 13.5% year-over-year increase from 13%, citing continued strength across verticals and better-than-expected channel checks,” the team added.

Alphabet’s AI Initiatives and YouTube Growth

Alphabet’s push into AI is also benefiting YouTube, with BMO analysts noting increased user engagement and more effective ad monetization. A reduction in ad spending on TikTok is further boosting YouTube’s performance.

This spring, President Joe Biden signed legislation requiring ByteDance, TikTok’s China-based parent company, to divest its U.S. assets by January 19 or face a complete ban in the U.S.

BMO analysts now expect YouTube revenue to reach $37 billion in 2024 and $43 billion in 2025, up from previous estimates of $36.5 billion and $42 billion, respectively.

“We also foresee significant growth for Google Cloud, driven by dual-cloud adoption among enterprises,” BMO stated. “We model a 28% growth for Google Cloud, with potential upside in the second half of 2024 due to increased gen AI workloads and easier comparisons relative to the first half.”

Alphabet is set to report its Q2 earnings after the close of trading on July 23. Analysts anticipate earnings of $1.84 per share on revenue of approximately $84.2 billion.

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