After two decades of dominance, is Google’s vaunted internet search business about to be dethroned by A.I.?

Alphabet, Google’s parent company, will release its quarterly earnings report after Tuesday’s market close, providing investors with some of the first data to help answer the question. The rise of generative A.I. tools over the past several months, and Google rival Microsoft’s embrace of A.I. in its Bing search engine in particular, make this one of Alphabet’s most highly anticipated earnings reports in years.

Expectations are “far more moderate, in terms of what investors are expecting from Alphabet, so the quarter might actually set up pretty well for them,” said Bernstein analyst Mark Shmulik. Still, with Alphabet shares up roughly 40% so far this year, the stock has room to fall.

Among the key questions for investors are the extent to which conversational A.I. chatbots like Bing Chat and ChatGPT have stolen users and advertising from Google Search, and how the new competition has affected Google’s internal spending and profit margins, especially given Google’s recent efforts to cut costs, laying off more than 12,000 jobs in early 2023.

“When they originally shared the comments around margin expansion at the beginning of the year, that was prior to all this stuff happening around A.I., and so effectively, the investment priorities have changed,” Shmulik said.

Wall Street analysts expect Alphabet to report $72.8 billion in revenue for the quarter ended June 30, which would represent a 4.5% increase year over year, and a notable slowdown from the same period last year, when Alphabet grew its top line by 13%. Analysts expected earnings per share of $1.34 for the quarter.

Alphabet generates roughly 80% of its revenue from online advertising, with the ads served up by Google’s search engine ranking among the company’s most lucrative services. Analysts and investors are worried that new A.I. bots, like Bing Chat, will cut into Google’s longtime moneymaker by answering users’ queries directly and making Google’s search page a less central destination on the internet.

Google has responded by releasing its own A.I. search tool, called Google Bard. And Google cofounder Sergey Brin has reportedly returned to the company to help with A.I. efforts, in a sign of how seriously the company views the opportunity and threat of A.I.

Investors will be looking for more details about these efforts when Alphabet CEO Sundar Pichai leads the conference call on Tuesday. In June, Pichai said that Google was better positioned for A.I. than it was during the shift to mobile computing a decade ago.

There have been mixed signals about the state of the search market, with some reports suggesting that the initial excitement around ChatGPT has cooled off and that the impact on Google’s search market share has so far been modest. “Anything that requires consumer behavior to change I’m always very skeptical,” Bernstein’s Shmulik said.

Shmulik was behind one of the two reports that smacked Alphabet stock with downgrades last month, but now that the bar has been lowered he sees the potential for surpassing expectations.

Search revenue will be key—people will want to see sequential growth from the first quarter. But search market share is also on investors’ minds.

Alphabet’s spending plans as a result of the A.I. wave will also be in the spotlight. The specialized servers and chips required to power A.I. could potentially drive up Alphabet’s capital expenditures, particularly as competition remains fierce with cloud providers like Microsoft Azure and Amazon AWS.

And the race to hire A.I. talent could push up operating expenses. According to [hotlink]Barclays,[/hotlink] however, Google’s deep ranks could give it an advantage. Barclays describes Google’s employee army as more efficient than that of Meta, TikTok, and Snapchat in an employee-to-user and scale ratio.

The hoarding of engineers that Google has conducted over the past few years will pay dividends, “in terms of shipping new products compared to other companies in consumer internet and software, but time will tell,” wrote Barclays analyst Ross Sandler in a May report.