Alphabet CEO Sundar Pichai.
AP
Alphabet suffered an unexpected slowdown in digital-advertising growth last quarter.
Google’s parent company reported declines in YouTube and Google Network ad revenues.
The slump is bad news for Alphabet’s peers and the wider US economy, analysts say.
Google-parent Alphabet shocked Wall Street with a surprise slowdown in its core search-advertising business last quarter, which contributed to a major earnings miss and sent its stock down 6% in premarket trading on Wednesday. The weakness bodes poorly for the digital-ad sector and the wider US economy, analysts say.
Google Search revenues rose by about 4%, or roughly half the 8% growth rate expected by analysts. Meanwhile, YouTube’s ad revenues slid 2% to $7.1 billion, and Google Network revenues dropped 2% to $7.9 billion.
Alphabet’s bosses blamed a challenging economic backdrop, unusually strong growth in the third quarter of 2021, and advertisers in sectors such as insurance, loans, mortgages, and cryptocurrencies spending less.
“In challenging times like these, advertisers are carefully evaluating the effectiveness of their budgets,” Google’s chief business officer, Philip Schindler, said on an earnings call.
Alphabet’s vast scale — it earned around $69 billion of revenue and $14 billion of net income last quarter alone — makes it a useful proxy for the advertising industry as a whole. Moreover, advertising demand is a useful bellwether for the US economy, as companies often reduce their ad spend before taking more drastic cost-cutting measures like firing workers or closing locations.
Alphabet said earlier this year it would reduce its pace of hiring and cut back on other expenses amid the slowdown.
Pressure on digital-ad spending at Alphabet isn’t too surprising, given the darkening economic outlook. Inflation hit a 40-year high of 9.1% in June, and remained above 8% in September. In a bid to curb further price increases, the Federal Reserve has hiked interest rates from virtually zero in March to a range of 3% to 3.25% today, and signaled they could approach 5% next year.
Higher rates make it more appealing to save than to spend or invest, and make it more expensive for companies and consumers to borrow money. While those effects can temper inflation, they can also weigh on economic growth, increasing the risk of a recession.
Advertisers may be pulling back because they’re seeing weaker demand for their products or services, or they’re dealing with higher costs and larger interest payments. Alphabet also faces intensifying competition from rivals like TikTok in video and Amazon in search.
“Google’s poor quarter is the latest sign that worsening fundamentals and a tough macroeconomic environment are prompting advertisers to cut back on spending,” Jesse Cohen, senior analyst at Investing.com, said in a note.
The enduring appeal of Google and YouTube mean Alphabet is unlikely to suffer a mass exodus of advertisers, but the slowdown is terrible news for its smaller peers.
“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,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said in a note.
“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,” she added.
Alphabet’s earnings don’t necessarily mean digital-advertising spend will dry up and the economy will tumble into a recession, but they definitely point to some tough days ahead. The company didn’t provide forward guidance for the coming quarters.