Google Earnings Drop as YouTube Ad Revenue Falls

Google dominates the search and advertising industry, but the company has recently missed earnings estimates as its operating income plunged by 19% year-over-year to $17.1 billion.
Alphabet (which is the parent company of Google) reported September-quarter profit and revenue that missed estimates as its core digital advertising business fell short of lowered expectations. Google stock (GOOGL) dropped on the Google earnings news as YouTube ad revenue fell.

About Google

Google is an American multinational technology company. Its focus is on search engine technology, online advertising, cloud computing, computer software, quantum computing, e-commerce, artificial intelligence, and consumer electronics. Because of its market dominance, data collection, and technological advantages in the area of artificial intelligence, Google has been referred to as “the most powerful company in the world” and one of the world’s most valuable brands. Google’s parent company Alphabet is considered one of the Big Five American information technology companies, alongside Amazon, Apple, Meta, and Microsoft.

Google was founded on September 4, 1998, by Larry Page and Sergey Brin while they were at Stanford University in California. They both own about 14% of its publicly listed shares and control 56% of the stockholder voting power through super-voting stock. The company sold its shares via an initial public offering (IPO) in 2004.

Google became part of Alphabet in restructuring in 2015. As Alphabet’s largest subsidiary, Google is a holding company for Alphabet’s Internet properties and interests.

Sundar Pichai was appointed as CEO of Google on October 24, 2015. He took the place of Larry Page, who became the CEO of Alphabet. In 2019, Sundar also became the CEO of Alphabet.

Since 2019 the company has rapidly grown. It offers a number of products and services beyond Google Search. Many of these hold dominant market positions. These products include email (Gmail), navigation (Waze & Maps), cloud computing (Cloud), web browsing (Chrome), video sharing (YouTube), productivity (Workspace), operating systems (Android), cloud storage (Drive), language translation (Translate), photo storage (Photos), video calling (Meet), music streaming (YouTube Music), video on demand (YouTube TV), artificial intelligence (Google Assistant), and many more.

Google earnings miss estimates

Weak third-quarter results of big tech stocks Microsoft and Google parent Alphabet has worried US markets, after weakness in crucial business lines that investors hoped would be resilient to an economic slowdown. Alphabet closed down 9.1%, while Microsoft finished 7.7% lower. Both stocks suffered their worst one-day declines since the beginning of the coronavirus pandemic in March 2020.

The earnings news ended an increase in growth during the coronavirus pandemic and put an end to hopes that they would withstand the inflation and weakening growth that are hitting the broader economy.

Analysts had forecast Google earnings of $1.26 per share on revenue of $71 billion. Net income growth and gross profit growth were more robust the previous year, with earnings of $1.40 per share on revenue of $65.1 billion.

Cowen analyst John Blackledge said in a report:

“Google reported an across-the-board miss on Q3 advertising as search, YouTube, and the ad network were all softer than expected, partially offset by a top-line beat at cloud.”

He added: “Management cited tough (year-over-year) comparisons, a pull-back by some advertisers and worse FX (currency exchange rates).”

Google stock has retreated 36% in 2022.

Google stock: YouTube revenue falls

Google Search revenue increased 4.2% to $39.5bn. It missed forecasts for 8% growth. On the other hand, YouTube advertising revenue fell 2% to $7.1billion compared to analysts’ expectations for an increase of 4.4%. YouTube ad revenue fell amid increased competition from TikTok. Google stock analysts had estimated YouTube ad revenue of $7.5 billion, up 3.5%.

It was the first drop for YouTube ad sales since the company started reporting its performance separately in 2020.

Alphabet’s CEO Sundar Pinchai said it was “a difficult time in the advertising market.” Despite Google’s earnings report, it is surprising to see YouTube’s growth decline, which affects Google’s outlook. Chief financial officer Ruth Porat said the slowdown was due to the company “surpassing a very strong third quarter” in 2021 as it benefited from a shift to online advertising during the coronavirus pandemic. However, she said that in some areas there has been a “drop in ad spending”.

In the meantime, overall Google advertising revenue rose 2.5% to $54.48 billion, missing estimates of $56.58 billion. Cloud-computing revenue increased

37% to $6.87 billion, edging by estimates of $6.7 billion.

Alphabet rebought $15.39 billion of its own stock, about the same as in the June 2022 quarter.

Google may make short-term cuts to reduce costs, including hiring freezes and potential job cuts.   Google had 186,779 employees as of Sept. 30, up 24% from a year earlier. These cuts should have an immediate positive effect on Google’s stock price in the following weeks. The previous month, Pichai said that he plans to make the company 20% more efficient.

Alphabet’s capital expenditures increased 7% in Q3 to $7.3 billion.

“It’s surprising to us that Google continued to hire and invest aggressively throughout Q3, knowing that macro trends were deteriorating,” Evercore ISI analyst Mark Mahaney said in a report.

Google is well-positioned to continue benefiting from AI

Google has the exclusive advantage of getting the benefits from AI investments from the search business and then applying the learnings to the YouTube ad business has a huge audience and had 7.6% of overall US TV time in August and nearly 22% of streaming time. YouTube uses machine learning to optimise how many times a viewer sees an ad from a specific company.

Google Cloud still remains the fastest-growing part of Google

Google Cloud remains the fastest-growing part of the business and has increased its revenue by a rapid 38% year-over-year to $6.9 billion.

Google has made their AI research, AI models and ML tool kits available to cloud customers as enterprise-grade products and solutions.

Machine learning is a key part of Google’s translation efforts and they are now up to 135 languages.

Every part of the tech industry faces pressures

Tech sector strategist Ted Morton at Baird said almost every part of the tech industry faced a difficult combination of pressures including a stronger dollar, falling consumer demand, weakness in Europe and Asia, rising interest rates and geopolitical tensions including US restrictions on the Chinese semiconductor industry.

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