Alphabet climbs as AI bets drive ad strength, quelling market fears

By Deborah Mary Sophia

(Reuters) -Alphabet shares jumped about 3% on Friday, after a solid earnings report from the Google parent showed investors that its bold bets on AI were fueling growth in the core advertising business, soothing some concerns around competition and tariff-related pressures.

Google's advertising revenue rose a better-than-expected 8.5% in the first quarter, in a welcome respite to investors who were worried that a decline in U.S. ad spending amid global trade tensions could significantly dent the digital ad market.

Industry data from early April that showed a sharp pullback in U.S. digital ad spending from Temu and Shein - the biggest advertisers on Google Search in the U.S. - further fanned fears.

Meanwhile, reports on cloud computing rivals Amazon and Microsoft scaling back on some data center projects had sparked fears that Big Tech might have been overly aggressive in its AI-related outlays, and rising economic uncertainty could be now forcing companies to rethink their plans.

"Against the backdrop of negative sentiment and data checks, regulation woes, competition concerns and macro related fears, Alphabet reported a blow to bears, with... strong growth across all major segments," Deutsche Bank analyst Benjamin Black wrote.

While Google noted that the Trump administration's recent trade policy changes would cause a "slight headwind" to its ads business this year, executives did not raise any alarm bells on a broad advertising slowdown.

Google's report helped lift social media stocks higher on Friday, with Instagram-parent Meta Platforms up 1.5% and image-sharing platform Pinterest rising nearly 2%. Snapchat-owner Snap climbed more than 3%.

After announcing a $70 billion share buyback plan, Alphabet also said AI Overviews - the summaries that appear above traditional hyperlinks to relevant webpages - now have 1.5 billion users per month, within about a year after its launch.

"Google is in a race versus OpenAI, Perplexity and others to drive AI usage, and we continue to believe Google has data and distribution advantages and has closed the ... performance gap," brokerage BofA Global Research said.

Alphabet's 12-month forward price-to-earnings ratio stands at 17.33, trailing Microsoft's 26.56 and Meta's 20.49. The stock has fallen about 16% this year, while Microsoft and Meta have lost some 8% and 9%, respectively.

"Perhaps Dr. Google is just what this market needed — a healthy dose of strong fundamental performance," Bernstein analyst Mark Shmulik said.

(Reporting by Joel Jose in Bengaluru and Lucy Raitano in London; Editing by Amanda Cooper and Shinjini Ganguli)