Alphabet – Ad Revenues Disappoint While Costs Soar

Published on
  • Alphabet Inc (NASDAQ:GOOGL)’s third quarter revenue rose 6% to $69.1bn, with advertising revenue rising from $53.1bn to $54.5bn. Both of these figures were lower than analysts expected. Within advertising revenue, YouTube advertising revenue dipped to $7.1bn from $7.2bn
  • Google Cloud revenue rose 37.6% to $6.9bn, but losses widened over $50m to $699m
  • Total group operating profit was 18.5% lower at $17.1bn, as total costs and expense rose around $8bn
  • Alphabet shares fell 5.3% in after-hours trading

Alphabet’s Advertising Revenue Slowdown

The slowdown in advertising revenue was not a surprise, but the speed of the slowdown was unwelcome, and the market is still highly sensitive to the changing tide. A weaker economic outlook will always put the brakes on a company’s ability to pay for marketing.

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Plenty of tech companies rely on advertising revenue and the changing economic temperature saw Snap’s shares enter a landslide earlier in the month. The reason Alphabet isn’t following suit to the same degree is because it’s utterly indispensable.

Demand may ebb and flow, but it will never turn off completely, and that’s reflected in a pretty remarkable share price performance over the last month. Google isn’t a trend that might dissipate, it’s a fundamental daily activity for swathes of the globe’s population.

YouTube is a potentially lucrative growth avenue too, with increased streaming activity and viewership a trend likely to continue, although the billion-dollar question of how to monetise the platform’s shorts is still lingering unanswered.

Ultimately, Alphabet’s leading market share and irreplicable scale leave it with barriers to entry so tall that it’s largely sheltered from the worst of economic storms.

This doesn’t mean it’s immune by any stretch and the worse-than-expected slowdown in ad demand has far reaching implications for other ad-reliant platforms. Investors will be bracing for Meta’s results with some trepidation, with a common thought being that if Google’s struggling, the rest of the tech pack faces a marathon climb.

An extra source of top-line growth comes in the form of Google’s cloud business. Google Cloud is likely to lag Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT)’s efforts. But coming third in a race with this much cash up for grabs is not the same as losing, far from it.

The division generates quarterly losses of close to $700m, but these should narrow at pace as companies continue their digital transformations and the group entices more customers onto the platform.

Fundamentally the only true long-term risk to Alphabet’s investment case is the heightened anti-trust landscape. Further political and legal scrutiny will happen – it’s a case of when not if.

Enormously deep pockets mean Alphabet can handle these blips on a financial-front, but it becomes a bigger question if today’s more ethically-minded investors were to reach the end of their patience. We’re a long way from that happening, but it’s prudent to monitor this risk.

Article by Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown