Alphabet's disappointing results show "pressures" on digital ad sector

(Alliance News) - Alphabet Inc on Tuesday reported a sharp fall in quarterly income on higher costs and foreign exchange headwinds, with markets reacting negatively to the news.

The stock was down 7.9% at USD96.21 on Wednesday in New York. In the year-to-date, the stock is down 34%.

Michael Hewson, chief market analyst at CMC Markets said the reaction was "understandable" given that revenue came in below expectations, and operating margins shrank.

In its third-quarter results, the California-based technology conglomerate reported a 27% fall in net income to USD13.91 billion, compared to USD18.94 billion a year before.

Its operating margin declined to 25% from 32%.

Revenue, meanwhile, rose by 6.1% to USD69.09 billion in the period from USD65.12 billion. The Google parent company attributed the rise to healthy fundamental growth in Search and momentum in the Cloud business.

Notably, however, Alphabet's YouTube platform recorded a drop in revenue. The figure fell to USD7.07 billion from USD7.21 billion the previous year.

Laith Khalaf, head of investment analysis at AJ Bell, said this was the first revenue fall for the platform "on record."

"While bad news for its parent company, the reversal in fortunes also says something less than encouraging about the state of the economy and is a negative omen for the wider digital advertising space," he continued.

Victoria Scholar, head of investment at interactive investor agreed, arguing that the "disappointing" result demonstrated the "pressures facing the digital ad sector as the US economy begins to show signs of weakness", and also pointed to the "stiff competition for eyeballs" - particularly among "fickle" social media users who are currently "fixated on their latest obsession", TikTok.

Sophie Lund-Yates, a lead equity analyst at Hargreaves Lansdown, said the slowdown in advertising revenue was "not a surprise", but added that the speed of the slowdown was "unwelcome" with the market "highly sensitive to the changing tide".

"Plenty of tech companies rely on advertising revenue and the changing economic temperature saw Snap's shares enter a landslide earlier in the month," Scholar argued, "the reason Alphabet isn't following suit to the same degree is that it's utterly indispensable."

Last Thursday, Snapchat's parent company plunged more than 26% on a quarterly earnings report that showed revenue was slowing as online advertisers tightened budgets.

Snap reported that it lost USD360 million in the third quarter of 2022, compared with a USD72 million loss the previous year. This came despite the number of daily users climbing 19% to 363 million.

Scholar argued that, unlike Snapchat, Google wasn't a trend that might dissipate but rather a "fundamental daily activity for swathes of the globe's population."

"Ultimately, 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," she continued.

For Scholar, the only "true long-term risk" to Alphabet's investment case is a heightened anti-trust landscape.

"Further political and legal scrutiny will happen – it's a case of when not if. Enormously deep pockets mean Alphabet can handle these blips on a financial front, but it becomes a bigger question if today's more ethically-minded investors were to reach the end of their patience. We're a long way from that happening, but it's prudent to monitor this risk," she concluded.

By Heather Rydings; [email protected]

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