Google’s earnings shortfall is a sign of danger in the internet advertising sector, and investors in Facebook and other competitors should be concerned.
Alphabet Inc.GOOGL,-3.59 percent GOOG,-3.04 percent, the parent company of Google, published first-quarter results on Tuesday that fell short of Wall Street expectations, with income at Google and YouTube both affected by the Ukraine conflict and weaker ad spending. However, the figures weren’t the only issue: Wall Street analysts were also dismayed by Alphabet Chief Financial Officer Ruth Porat’s comments regarding a likely slower second quarter and slower revenue growth at YouTube.
Many analysts were concerned about YouTube’s slower growth rate and whether it was facing increased competition from TikTok. YouTube revenue increased 14.39 percent to $6.9 billion in the first quarter, the slowest growth in the previous five quarters. YouTube revenue, for example, increased by 48.7% in the previous quarter.
Porat accused Russia’s invasion of Ukraine; Alphabet, like many other American companies, halted operations in Russia after the country went to war with Ukraine. According to executives, the loss of revenue from Russia amounted to around 1% of the company’s total revenue.
“The conflict had a disproportionately large impact on YouTube ads compared to the rest of Google,” Porat added. “And that was due to both the suspension of the great majority of our commercial activity in Russia and, as I mentioned earlier, the resulting reduction in spend by brand advertisers in Europe.”
Analysts were sceptical of such explanation, instead focusing on the emergence of TikTok. One analyst stated that he has heard concerns about TikTok’s increased rivalry impacting YouTube’s mobile usage.
“We’ve seen huge investment in online video and a lot of innovation,” Sundar Pichai, CEO of Alphabet, said, “but there are 2 billion-plus logged-in users that visit YouTube every single month and more people are creating content on YouTube than we’ve ever seen.”
Concerns about the general macroeconomic advertising environment and forecast, in addition to YouTube, alarmed some analysts. According to Porat, revenue growth rates in Google Services’ advertising businesses benefited from the COVID-related weakness in 2020.
“Obviously, that tailwind won’t be there for the remainder of the year,” she remarked. “As we stated in previous calls, COVID had the greatest impact on our results in the second quarter of 2020, which implies that as we near the end of our recovery in the second quarter of 2021, we will face a particularly difficult comp in the second quarter of 2022.”
Wall Street had expected Alphabet to withstand the crisis in the internet advertising business, where Apple Inc.’s AAPL, -3.73 percent privacy improvements to iOS have wreaked havoc on Facebook parent Meta Platforms Inc. FB, -3.23 percent and other ad-based firms. Comments about Google’s ad and search business are likely clues that other internet businesses, beginning with Facebook on Wednesday, will announce even worse results in the following weeks.
Alphabet’s stock plunged 4% in after-hours trading Tuesday, however a substantial boost in its stock repurchase plan — to $70 billion, up from $50 billion last year — likely helped its shares avoid any more damage, with the stock ending the session down 2.7 percent. Meta, whose shares dropped nearly as much in Tuesday’s after-hours session, might not be so fortunate.
Investors will have a difficult time finding a better choice among Alphabet’s few competitors if it is no longer a port in the storm.