BofA says Google Cloud Next can boost AI sentiment for Alphabet

Google Cloud’s Next Conference is taking place in Las Vegas from April 9 to 11. The event is expected to be hyper-focused on the company’s generative AI and AI ambitions. BofA believes positive commentary on advances in AI infrastructure, Gemini’s capabilities vs. competitive LLMs, or traction with AI customers could address some of the AI-related overhang on Alphabet’s (GOOGL) stock.

AI SENTIMENT ON THE STOCK: BofA finds the timing of Google Cloud’s conference interesting as just 7.5 months since Cloud Next was held last year, possibly suggesting some advancements with Gemini LLM or other AI products to highlight. Google Cloud CEO Thomas Kurian’s Day 1 keynote on April 9th should be a focal point, says the firm. BofA expects Google to continue to highlight its multi-LLM model capabilities to help customers best fit models for their applications, but also highlight advancements with Gemini LLM, which began rolling out in December. Positive commentary on advances in AI infrastructure, Gemini’s capabilities vs. competitive LLMs, or traction with AI customers could address some of the AI-related overhang on the stock, the firm adds.

AI ENHANCEMENTS: A number of customers and partners are scheduled to speak at the conference, including Walmart (WMT), Nvidia (NVDA), Ford (F), and Wayfair (W). BofA expects Google’s growing AI capabilities across the infrastructure, platform and application layers to be top focus of the conference. The firm expects new product launches and Al related announcements on the mew LLM capabilities with Gemini and on Vertex AI for mutli-model use, AI integrations for Workspace, improving TPU capabilities and update on GPU capabilities, enhanced cybersecurity capabilities, AI-related partnerships with ISVs and System Integrators, expansion to new regions and availability zones, and case studies highlighting traction with Al startups.

CLOUD GROWING: BofA believes Cloud has the potential to be a positive driver for Alphabet stock given the growing scale and faster growth vs ad business, accelerating AI demand driving possible Cloud revenue acceleration following a strong fourth quarter, increasing margins aiding Google’s EPS, and aiding Street sentiment on the stock by suggesting Google has strong AI capabilities.

The firm estimates Google Cloud will grow revenues from $41B in 2024 to $58B by 2026, and increase margins from 9% to 13%, adding $4B in profit. Applying a 7-9-times revenue multiple on 2026 revenues, yields potential $400B-$500B in value contribution from the Cloud, or close to 20%-25% of Alphabet’s current market cap. With unique AI assets, including proprietary infrastructure and an advanced LLM model, the firm believes Google cloud has an opportunity to differentiate its cloud offering, improving market share and Street sentiment. BofA has a Buy rating on Alphabet’s shares with a price target of $173.

WHAT’S NOTABLE: Late last week, Reuters‘ Anirban Sen and Milana Vinn reported that Alphabet is in talks with advisers about potentially making an offer for online marketing software company HubSpot (HUBS). According to people familiar with the matter, Alphabet has met with Morgan Stanley (MS) investment bankers about a possible offer for HubSpot, and has discussed how much it should offer and whether regulators would approve a deal.

Stifel sees the merits of combining this CRM suite with Google’s existing productivity suite and advertising tools, as the combination would deepen platform capabilities on both the front and back end of “customer journeys.” Alphabet and HubSpot coming together could present an alternative to the market, but at a level below the full-scale enterprise market that Microsoft (MSFT) and Salesforce (CRM) play in today, the firm says. Stifel made no change to its Buy rating on HubSpot.

Meanwhile, Evercore ISI told investors in a research note that while a reported combination makes sense at a 30K foot level, there would be a lot of hurdles for this to come together. The firm wonders why Google wouldn’t first spin off Google Cloud Platform and then buy HubSpot to create a standalone software business that doesn’t have to deal with the regulatory issues that overhang Google’s consumer businesses, and while Evercore “gets” the broader rationale, finds it “odd” that HubSpot would be willing to see their business subsumed into an acquirer where it would be essentially lost in a sea of businesses. Evercore ISI made no change to its In Line rating or $560 price target on HubSpot.

PRICE ACTION: In morning trading, shares of Alphabet have gained about 2% to $154.87.