We're Boosting Two Price Targets, Downgrading One Rating
Both reports confirm AI adoption is unfolding, offering support for other Portfolio holdings.
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Now that we’ve digested the July Flash PMI data and executed trades that added to our positions in Axon Enterprise AXON, Costco COST, and Dutch Bros BROS, let’s turn to the better-than-expected quarterly results last night from Alphabet GOOGL and ServiceNow NOW. The results and guidance have prompted multiple price target hikes for both names across Wall Street, and we are joining that thinking by lifting our GOOGL target to $220 from $200, and our NOW target to $1,200 from $1,100.
While the current share price for GOOGL offers enough upside to maintain a One rating, the relative strength index (RSI) level of ~74 leads us to downgrade it to a Two. That RSI level reflects the accelerated move higher in GOOGL shares over the last few weeks.
Turning to NOW shares, we will maintain our One rating even after the recent pop, given upside to our new target, which should be fueled by the continued mix shift toward AI solutions as part of the company’s overall subscription revenue stream.
Connecting the dots between the results from these two holdings and others in the Pro Portfolio, Alphabet increasing its 2025 capex to $85 billion from $75 billion bodes well for our shares of Nvidia NVDA and Marvell MRVL. Given recent comments from Meta META, we would not be shocked to see it lift its 2025 capex budget as well, nor would we count out Microsoft MSFT and Amazon AMZN on that front either.
Combined AI adoption comments from SAP SE SAP earlier this week and from ServiceNow last night keep us bullish on AI and data center capital spending, as well as the impact of AI adoption on Axon and Elastic ESTC shares. We continue to believe that adoption fosters incremental capital spending on enterprise and carrier networks as AI usage climbs, taxing network capacity in the process.
Google Earnings
Alphabet delivered June quarter EPS of $2.31, well ahead of the $2.18 consensus, while its top line of $96.4 billion, up almost 14% year over year, also bested the market forecast of $93.9 billion. Despite concerns over AI eating into its core Search & Advertising business, revenue for that segment climbed almost 12% compared to the year-ago quarter and was also up 7% on a sequential basis. Continued gains at YouTube also contributed to the core Google Advertising revenue growing year over year, as did the subscription and device business. No surprise given the growing influence of YouTube that we’ve discussed with you in recent weeks.
Management touched on its AI progress during the earnings call, noting that it now has more than 450 million monthly active users for its Gemini app, with engagement up 50% compared to first-quarter 2025. That supports our view that rising AI adoption will eventually foster network capital spending. Google also shared that the blending of its AI and Search offering is driving Search usage (something we can attest to). AI is also increasing the reach of YouTube content, and we also suspect it is helping drive smarter advertising as well, an additional benefit for Google.
Google Cloud also continued to make gains for both its revenue contribution and its operating margin compared to the prior quarter and especially against the year-ago one. Granted, the 21% operating margin posted in the quarter for Google Cloud is well below the 43% of total Google Services revenue, but it’s come a long way over the last few quarters when its operating margin was sub-10%.
We continue to see Google Cloud benefiting from enterprise cloud and AI adoption, especially as it integrates more AI agents into each of its cloud products. Per management, more than 85,000 enterprises, including LVMH LVMHF, Salesforce CRM, and Singapore's DBS Bank, now build with Gemini, driving a 35x growth in Gemini usage year-over-year. Impressive, but so is the cloud backlog figure of $106 billion discussed on the earnings call. That should allow for continued revenue growth even as the segment passed the $50 billion annual run rate figure in the June quarter.
And for those keeping track, Alphabet ended the June quarter with $95 billion in cash and marketable securities.
ServiceNow Earnings
Turning to ServiceNow, the company crushed June-quarter EPS expectations, delivering EPS of $4.09 vs. the $3.57 market forecast. Revenue grew more than 22% to $3.21 billion, also besting market expectations, but it also accelerated from 18.5% in the March quarter. The primary driver for that was Subscription revenue, which accounts for more than 96% of ServiceNow’s revenue stream, as it grew 22.5% during the quarter and its renewal rate came in at 98%. We see that speaking to ServiceNow’s level of customer entrenchment, which also bodes well for its ability to reap the benefits of AI adoption that boosts its revenue and margins.
Backing that thinking, we saw a nice uptick in current remaining performance obligations (RPO) to $10.92 billion compared to $8.78 billion in the year-ago quarter. To that, we can add the $13 billion in noncurrent RPO, up 29% year over year, which puts its total RPO at almost $24 billion. We see that offering ample coverage for management’s revised subscription revenue outlook of $12.775 billion-$12.795 billion for this year. That equates to about 9% stronger revenue in H2 2025 compared to H1 2025, and even stronger growth compared to H2 2024.
As we’ve come to expect, ServiceNow named-dropped several customer wins, this time for its AI platform, which included Exxon Mobil XOM, Merck & Co. MRK, Banco do Nordestes Brasil, and the North Carolina Department of Transportation. Those wins and others led ServiceNow’s AI deal count to be up over 50% quarter on quarter. In the Signals that we’ve shared with you, it’s become clear that AI is a key focus in the enterprise, and we continue to see ServiceNow very well positioned for that adoption.
Exiting the June quarter, ServiceNow had $10.8 billion in cash and investments on hand. During the quarter, it bought back approximately 381,000 shares as part of its share repurchase program, leaving $2.6 billion under the current authorization.
At the time of publication, TheStreet Pro Portfolio was long AXON, COST, BROS, GOOGL, NOW, NVDA, MRVL, META, MSFT, AMZN and ESTC.
