Alphabet slowdown spooks digital advertising

Alphabet, owner of major media properties including Google and YouTube, has missed some earnings estimates, sparking worry that the company's self-serve ad products catering to SMEs and major brands could hint at more difficulties to come.

Why it matters

The sheer numbers are massive – Q3 revenues stand at $69.1 billion – but so is Alphabet’s expected growth, which is where it fell short. Analysts had expected the company to grow its income by 9% but it managed just 6%.

Speaking to investors on Tuesday, CEO Sundar Pichai observed that it's “a tough time in the ad market”.

But much of this is in the digital space. The latest round of results among the major agency holding groups has indicated cautious positivity about brands’ willingness to continue to invest in marketing in general.

Digital ad groups such as Alphabet cater to a much larger client base, with many small and medium-sized businesses buying their marketing services through the firm, especially for search advertising. The fact that YouTube's advertising shrank could suggest bigger trouble among brands.

Numbers year-on-year

• Search advertising grew 4.25%
• YouTube advertising shrank 1.85% – its first decline on record and against an expected 4.4% increase
• Google Network advertising shrank 1.58%
• Total net income shrank 26.5%

There is a lot to chew on at a macro level. For an American company, the strong dollar makes life more difficult because selling their services around the world becomes more expensive for their customers.

In addition, the pandemic had been quite a lucrative time for the company as people came online and spent a lot of time searching and watching. This led to lots of advertisers spending on the platform. Alphabet is now lapping a very strong third quarter in 2021 in a far tougher environment.

Key quote

“The sequential deceleration in the year-on-year growth of Search in the third quarter versus the second quarter was also driven by lapping with an additional headwind from pullback in advertiser spend in some areas.

“In YouTube and Network, the sequential deceleration of year-on-year growth in the third quarter versus the second quarter primarily reflects further pullbacks in advertiser spend” – Ruth Porat, CFO Alphabet, speaking to investors.

Sourced from Alphabet, Seeking Alpha, FT