Alphabet and Meta Ad Sales in Q4 Unlikely to Reflect Investments in General Artificial Intelligence (AI)

Generative AI, capable of creating text and photos from prompts, is currently in the ‘hype cycle,’ according to analysts at Bernstein. Investors are now seeking incremental use cases and revenue streams stemming from these recent advancements.

Despite the buzz surrounding generative artificial intelligence last year, the impact on the advertising business of Alphabet and Meta Platforms is expected to be subdued in the fourth-quarter results. However, investors are actively considering and mapping out the future potential of this technology.

The search giant has introduced AI tools facilitating advertisers in cost-effective audience targeting and optimizing marketing budget allocation across Google’s ad network. Meta, the parent company of Facebook, is leveraging generative AI to create diverse variations of ad campaigns.

Generative AI, capable of creating text and photos from prompts, is currently in the ‘hype cycle,’ as noted by Bernstein analysts in a recent research note. Investors are now eagerly anticipating the emergence of incremental use cases and revenue streams resulting from these recent advancements.

The core business of digital advertising is anticipated to have remained robust in the quarter ending December 31. Warnings about potential dampening of the ad market due to economic and geopolitical uncertainty are likely to be overstated, according to the brokerage’s separate note last week.

Microsoft, set to report quarterly results on Tuesday, is expected to be an early beneficiary in the emerging generative AI race. This trend has engaged various tech and social media companies, ranging from Amazon.com to Snap. Generative AI has notably boosted demand for Microsoft’s cloud services.

Alphabet’s stock saw a 58% surge last year, while Meta’s stock nearly tripled. The broader S&P 500 index gained roughly a quarter in 2023, buoyed by an AI-fueled tech rally.

As we enter 2024, ‘an additional catalyst… other than AI, will be the big focus on political advertising and will boost businesses at Meta and Google,’ said D.A. Davidson and Co analyst Gil Luria.

Spending on political advertising in the U.S. is projected to increase by 30% this year compared to the last presidential election in 2020, driven in part by higher expenditures on digital platforms, as estimated by research firm Insider Intelligence.

On Tuesday, Google parent Alphabet is anticipated to report that fourth-quarter advertising revenue, its primary revenue source, grew by 11.8% to $66 billion, according to LSEG data.

Google introduced its experimental AI chatbot Bard in early 2023 and launched a search generative experience (SGE) that generates written responses to certain Google Search queries. While SGE was expanded to 120 countries in November, its impact on Google’s business in the near term may be limited.

New Street Research analysts projected in October that by 2025, SGE could contribute between $35.6 million and $113 million in incremental search advertising revenue in “upside scenarios.” The key factor influencing this estimate is the frequency with which users click on ads displayed in AI-generated responses.

Meta, as the second-largest digital ad platform, has demonstrated the potential of its work in artificial intelligence (AI) to deliver results for advertisers. Through AI tools that can generate images and backgrounds for ads, Meta has garnered positive feedback from advertisers.

Regarding the information provided, it seems like you are highlighting the positive impact of Meta’s AI tools on advertisers. The survey results, indicating potential time savings for advertisers using Meta’s AI tools, suggest a positive reception in terms of efficiency and productivity.

Additionally, the estimated fourth-quarter revenue of $39.1 billion, at the higher end of Meta’s guidance, indicates analysts’ optimism despite concerns raised in October about potential impacts on ad spending related to the Israel-Hamas conflict. It showcases the resilience and adaptability of Meta’s advertising platform in the face of various challenges.

Meta’s suite of AI tools, designed to automatically identify potential customers and test the performance of ads, is reportedly generating $10 billion on an annualized basis, according to Meta’s statements.

Additionally, there are expectations that if Meta introduces paid ads within the AI assistants recently launched for answering questions in WhatsApp, Messenger, and Instagram, it could result in an estimated $6.7 billion in ad revenue by the year 2025, as estimated by New Street Research.

The introduction of such ads could potentially be a significant boost for Snap, the owner of the photo messaging app Snapchat. Snap had partnered with Microsoft in September to integrate sponsored product links in its chatbot named My AI.

New Street Research estimates that Snap is expected to earn $234 million from these links in the current year. This figure is projected to grow to $686 million in 2025, constituting over 11% of the company’s annual revenue. Analysts are anticipating that Snap will report fourth-quarter revenue of $1.4 billion, reflecting a 5.7% increase from the previous year.

Amazon.com is set to start displaying ads on its Prime Video service, and according to RBC Capital Markets, the company is also working on building partnerships for Amazon Bedrock. Amazon Bedrock is described as a service that enables businesses to develop applications using various AI models.

The introduction of ads on Prime Video is anticipated to contribute to Amazon’s ad revenue growth by 5% to 10%, as indicated by RBC Capital Markets in its 2024 outlook report. The report suggests that Amazon’s foray into advertising on its streaming platform could have a notable impact on its overall advertising revenue. Amazon’s financial results are expected to be reported on Thursday.

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