Alphabet "vulnerable" in recession as corporates cut advertising spend

(Alliance News) - Google parent company Alphabet disappointed with its fourth quarter results late Thursday, as investors fret about the resilience of its advertising-dependent business model during an economic downturn.

In the final quarter of 2022, the Google-owner reported revenue of USD76.05 billion, up 0.9% from USD75.33 billion the previous year.

"The main drag was in advertising with YouTube ad revenue coming in light at USD7.96 billion, down from USD8.6 billion a year ago, while advertising revenue came in at just over USD59 billion, also down from last year," said CMC Markets' Michael Hewson.

Most of its revenue segments lagged behind the prior year, save for Google Cloud, which surged 32% to USD7.32 billion.

However, the weak performance of its core offering, namely advertising, was cause for concern for investors.

Alphabet's class A shares dropped 4.0% to USD103.40 in pre-market trade in New York on Friday.

"Alphabet makes its money from digital advertising and search and is vulnerable going into an economic downturn from businesses scaling back promotional spending," said AJ Bell investment director Russ Mould.

Although many believe there won't be a "serious" recession, Mould contends the "weaker sentiment among corporates" has already fed into lower spending on digital advertising.

“Alphabet will be hoping the drop in business and consumer confidence is at or close to the trough and advertising spend soon starts to pick up," Mould added.

Net profit dropped 34% year-on-year to USD13.62 billion from USD20.64 billion, as costs climbed. Diluted earnings per fell to USD1.05 from USD1.53.

In the year as a whole, revenue climbed 9.8% to USD282.84 billion from USD257.64 billion. Annual net profit, meanwhile, fell 21% to USD59.97 billion from USD76.03 billion. Diluted EPS fell to USD4.56 from USD5.61.

The firm also updated on the recent layoffs, having announced around 12,000 job cuts last month.

On Thursday it said that it expects to incur employee severance and related charges of USD1.9 billion to USD2.3 billion as a result, the majority of which will be recognized in the first quarter of 2023.

"There is clearly a focus on cost savings and caution for the year ahead," said Shore Capital.

The broker said the drop in share price drop signals "concern around [a] slowdown" within the major tech players, with Apple and Amazon also having reported "disappointing" results.

By Elizabeth Winter, Alliance News senior markets reporter

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