Alphabet causes shock in digital advertising as growth slows

Alphabet sent shockwaves through the worlds of digital advertising and e-commerce when it reported an unexpected sharp drop in its core search ad business, sending tech stocks selling off and raised fears of a recession in the US.

The company’s third-quarter revenue of the largest digital ad seller in the US rose 6% to $69.1 billion. With the exception of a slight dip at the start of the pandemic, this was the slowest growth rate since 2013 and fell short of analysts’ expectations of a 9% increase, according to Refinitiv.

Microsoft added to the tech gloom on Tuesday as it warning of a marked slowdown in its cloud business in the coming months. Like search advertising, cloud computing was once seen as a business that was less vulnerable to economic downturns than other parts of the tech market.

Share in Alphabet fell more than 6% in pre-market trading on Wednesday following lackluster results. Shares of Microsoft fell 5.7%. The news comes at the start of Big Tech’s earnings season, which has triggered a sell-off in shares of industry leaders including Meta and Amazon, both of which fell about 3.5% before New York. opening. Futures that track the tech-heavy Nasdaq 100 index fell 1.4%.

“It’s a bad omen for digital advertising in general,” said Evelyn Mitchell, an analyst at Insider Intelligence. “This disappointing quarter for Google signals tough times ahead if market conditions continue to deteriorate.”

Google Search revenue rose 4.2% to $39.5 billion, missing forecasts for an 8% increase, while YouTube ad revenue fell 2% to $7.1 billion, falling short of expectations. Analysts are up 4.4%. This is the first drop in ad sales on YouTube since the company began separately reporting on its performance in 2020.

On a call with investors, Alphabet chief executive Sundar Pichai said these are “tough times in the advertising market.”

Ruth Porat, chief financial officer, said the slowdown was because the company “ended a very strong third quarter” in 2021, when it benefited from a shift to online advertising during the coronavirus pandemic. But she says there has been a “recovery from advertiser spend in some areas”.

Alphabet reported diluted earnings per share of $1.06 for the quarter from $1.40 in the same period last year and well below the $1.25 expected by analysts.

Line chart of Except for a freak pandemic quarter, Alphabet is growing at its slowest rate since 2013 showing Google searches on growth

The poor results are the latest sign of a slowdown in digital advertising and the world’s largest economy as a whole as consumers and businesses pull back on spending at a time of soaring inflation. . Marketing budgets are often the first place companies go when trying to cut costs.

On Tuesday, a closely watched measure of consumer confidence fell to its lowest level in more than a year. The so-called current situation index, released by the Conference Board, fell to 138.9, the weakest reading since April 2021.

Lynn Franco, senior director at the Conference Board, said the sharp drop indicated economic growth had slowed at the start of the fourth quarter and described consumer expectations as “dismal”.

Spotify, the audio streaming service provider that counts the US as its largest market, said on Tuesday that the “challenging” economic environment affected its ad sales in the third quarter. , which contributed to larger losses despite solid growth in its primary business of selling subscriptions. .

Last week, shares of Snap, the developer of Snapchat, lost almost a third of its value after it said advertisers are continuing to cut marketing budgets because of rising inflation and costs.

Revenue at Alphabet’s fast-growing Google Cloud division rose 38% to $6.9 billion, but the division still recorded a net loss of $699 million compared with a loss of $644 million a year earlier.

Pichai told investors that the team is “intensifying our focus on a clear set of business and product priorities”.

According to Porat, a strong US dollar has reduced revenue growth by 5 percentage points.

Alphabet’s earnings set the stage for Facebook’s parent Meta, which reported results on Wednesday. Analysts expect its revenue to fall 5% in the third quarter.

Additional reporting by Anna Nicolaou and Richard Waters


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