Google Earnings Preview: Results Likely to Exceed Expectations, Capital Expenditure Guidance Is the Key Focus

BofA Securities expects Alphabet’s fourth-quarter revenue and earnings per share to both exceed market expectations, and points out that the increase in capital expenditure may become a key variable in this earnings report. Google’s parent company Alphabet will disclose its FY2025 fourth-quarter results after U.S. market hours on February 4 Eastern Time.

BofA analysts raised Q4 revenue estimates to $95.9 billion (market expectation: $95.2 billion), and EPS estimate to $2.65 (market expectation: $2.64). Core factors supporting the above-consensus performance include: Meta’s strong financial results show the Q4 advertising market remained steady, while accelerated usage after the release of Gemini 3 is expected to drive search business growth to 15%-16% (higher than the market’s 13% expectation), and YouTube growth may reach 14%-15% (market expectation: 13%). Q4 operating expenses are estimated at $28 billion, an increase of 13% year-over-year, and operating margin may improve by 119 basis points YoY.

Impacted by Meta’s significant increase in capital expenditure guidance, BofA has raised its estimate for Alphabet’s 2026 capital expenditure by 14% to $139 billion, significantly higher than the market expectation of $119 billion.

Fourth-quarter estimates revised up, advertising business likely to beat expectations

BofA Securities has raised its estimate for Alphabet's Q4 revenue. Search revenue estimate was raised from $61.5 billion to $61.9 billion, up 15% YoY, consistent with Q3 growth; YouTube ad revenue estimate was raised from $11.8 billion to $12 billion, also up 15% YoY; cloud business revenue estimate remains at $16.2 billion, up 35% YoY.

Meta’s strong financial performance and channel research both show the digital advertising market remained overall stable in Q4. Further research points out that Google’s momentum in advertising innovation continues to strengthen, mainly thanks to the deep integration of the Gemini model in its ecosystem. The search business is benefiting from AI-driven tools such as Performance Max and AI Max, which enable more effective use of user data on the platform for precise targeting and attribution analysis. Although new AI search formats may have some impact on overall query and click volume, industry data shows conversion rates have significantly improved and are expected to offset any potential pressure on traffic.

As for YouTube, research shows its growth remains robust, with Q4 YoY growth rate expected to remain flat or slightly up, mainly driven by performance ad spending. Google's expanding generative AI creative tools are lowering the production barrier for video ads, simplifying the production and campaign process. Incremental YouTube advertisers mainly come from small and medium enterprises using Performance Max, which can automatically generate video assets and directly deploy them on YouTube.

Strong cost control but depreciation expenses keep rising

BofA Securities expects Alphabet’s Q4 operating expenses to be $28 billion, lower than the market expectation of $28.7 billion, up 13% YoY. Operating margin is expected to improve by 119 basis points YoY to 39.1%, and expand 344 basis points quarter-over-quarter; core services margin is expected to improve by 99 basis points YoY to 40.0%.

The cost structure shows depreciation expense for the period is expected to be $6.3 billion, a sharp increase of 49% YoY and up 7% QoQ. Excluding depreciation and amortization, the Q4 cost base would be only up 5.3% YoY. Hiring data shows the company continues to implement strict cost control, with the average quarterly position vacancies down 7% QoQ. The market generally expects Q4 headcount to be up by about 900 people QoQ, and up 4% YoY.

In addition, other income items may include one-off positive effects. BofA has raised the estimate for Q4 other income from $80 million to $130 million, mainly reflecting reevaluation gains from stakes in unlisted companies such as SpaceX and Anthropic.

Significant increase in capital expenditure, accelerated investment in cloud business

Driven by Meta’s substantial hike of its 2026 capital expenditure guidance (to $115 billion-$135 billion), BofA Securities has revised Alphabet’s 2026 capital expenditure forecast up by 14% to $139 billion, up about 50% YoY, and expects it to account for 35% of net revenue. Analysts note the company may provide near-$140 billion annual guidance in the upcoming earnings call, much higher than the market’s current $119 billion expectation.

BofA expects Q4 single-quarter capital expenditure of $29.2 billion, up 22% QoQ and 105% YoY; free cash flow in the same period is expected to be $11.7 billion, down 53% YoY, accounting for 12% of net revenue. Despite the continued increase in capital intensity, considering Google’s broad AI layout and cloud business expansion needs, analysts believe its capital deployment efficiency still surpasses its peers, with internal AI capabilities relying on the TPU system possibly creating certain cost advantages.

Looking back at previous guidance, in Alphabet’s Q3 FY2025 earnings call the company had already raised its full-year capex guidance range to $91-$93 billion. The company noted capital expenditure is mainly allocated to technical infrastructure, with about 60% invested in servers and the remaining 40% for data centers and network equipment.

Upside potential for search and cloud business in 2026

BofA Securities believes as the penetration rate of AI-native formats in Google search increases, the market may be underestimating the growth potential of the search business in 2026; its upside is likely to be realized through higher user engagement, improved conversion rates, and new monetization opportunities. In cloud business, synergies between Gemini 3.0 and TPUs are gradually building product differentiation for Google, which may drive new major contract signings.

On risks, the company’s current valuation is relatively high (P/E ratio above Microsoft) and faces potential pressure from new competitive product launches, including the rapid iteration of large language models and competitors such as OpenAI entering the ad market, which may impact market sentiment. Calculated using expected 2027 earnings, Alphabet is currently trading at a 27x P/E, higher than the S&P 500’s 22x.

The institution believes that, given the company is expected to maintain double-digit revenue growth, the continued expansion of cloud business profit margins, and its ability to efficiently leverage powerful AI assets, the current valuation multiple is reasonable compared to its historical average P/E of 22x.

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