Alphabet shares move higher as better than expected results soften blow from advertising disappointment

"Alphabet is having to work harder to stay on top amid unpredictable corporate advertising demand and competition heating up in search and cloud computing," says Dan Coatsworth, investment analyst at AJ Bell.

"Another robust quarter shows the business has found the right ingredients to stay strong, but it hasn't all been plain sailing.

"Investors were quick to find fault and the spotlight immediately shone on a slowdown in Google's advertising growth at 11.1% in the second quarter versus a 13% gain in the previous three-month period, year-on-year. YouTube's advertising revenue was also slightly below forecasts. That triggered volatility in the share price in after-hours trading, despite a strong showing from the cloud arm and overall earnings beating expectations.

"The fact the stock was initially down one minute and up the next after the results implies that investors might be losing conviction in Alphabet. There are already lingering concerns about the Magnificent Seven and whether the best days are over for their share prices, at least in this point in the cycle. The past few weeks have shown signs we might be in the early days of a market rotation away from the mega cap tech names towards more value-orientated stocks.

"Advertising demand can be cyclical and the slightest bit of uncertainty around the state of the economy, strength of consumer finances or political upheaval can quickly make corporates scale back or pause spending on promotions. That is firmly at play at the moment, but Google is well versed in riding the ups and downs.

"More importantly, Alphabet needs to show it can deal with the competitive threat of ChatGPT with AI-related search functions and that it has enough muscle to battle Amazon and Microsoft on the cloud side. So far, it is holding up well on both accounts, although a lot can change at the click of a finger, particularly in AI where technological advancements are coming hard and fast.

"The group is still making decent strides in both advertising and cloud computing, and its enormous revenues and ongoing strategic achievements act as a reminder as to why so many investors turned to the titan of tech in recent years.

"Significant investment has gone into the business and the fruits of labour are now being realised. For example, there are lots of initiatives being rolled out which should help keep the company one step ahead, such as the ability to analyse images to obtain information and have better processing capabilities for cloud customers.

"It was also ahead of the curve years ago with YouTube and recognising the power of user-generated content. It is now reaping the benefits as the platform continues to grow.

"What's clear is that Alphabet still has plenty of ideas for how to innovate and the financial strength to try lots of new things. Not everything will work, but its willingness and capacity to have a go is a major advantage. Beating earnings expectations for six quarters in a row also shows the business still has plenty of fuel left in the tank."