Alphabet causes shock in digital advertising as growth slows

Alphabet sent shockwaves through the worlds of digital advertising and e-commerce when it reported an unexpected sharp drop in its core search ad business, sending tech stocks selling off and raised fears of a recession in the US.

The company’s third-quarter revenue of the largest digital ad seller in the US rose 6% to $69.1 billion. It was the slowest growth rate in more than two years and fell short of analysts’ expectations for a 9% increase, according to Refinitiv.

“It’s a bad omen for digital advertising in general,” said Evelyn Mitchell, an analyst at Insider Intelligence. “This disappointing quarter for Google signals tough times ahead if market conditions continue to deteriorate.”

Shares of Alphabet fell 6.3% in after-hours trading on Tuesday following lackluster results, leading to a sell-off in shares of other tech companies including Meta and Amazon, which fell 3 percent, respectively. .5% and 1.4%. Microsoft, which also reported earnings on Tuesday, fell 2%.

Google Search revenue grew 4.2% to $39.5 billion, missing forecasts for 8% growth, while YouTube ad revenue fell 2% to $7.1 billion, compared with analyst expectations for a 4.4% increase. This is the first drop in ad sales on YouTube since the company began separately reporting on its performance in 2020.

Alphabet reported diluted earnings per share of $1.06 for the quarter from $1.40 in the same period last year and well below the $1.25 expected by analysts.

Line chart of Except for a freak pandemic quarter, Alphabet is growing at its slowest rate since 2013 showing Google searches on growth

The poor results are the latest sign of a slowdown in digital advertising and the world’s largest economy as a whole as consumers and businesses reduce spending at a time of high inflation. Marketing budgets are often the first stop for companies trying to cut costs.

Earlier, on Tuesday, a closely watched measure of consumer confidence fell to its lowest level in more than a year. The so-called current situation index, released by the Conference Board, fell to 138.9, the weakest reading since April 2021.

Lynn Franco, senior director at The Conference Board, said the sharp drop indicated economic growth had slowed at the start of the fourth quarter and described consumer expectations as “dismal”.

Spotify, the audio streaming group that sees the US as its biggest market, on Tuesday said the “challenging” economic environment had also affected its ad sales in the third quarter, contributing to the slowdown. resulted in larger losses despite solid growth in its core business of selling subscriptions.

And last week, shares of parent company Snapchat lost almost a third of their value after speak Advertisers continue to cut marketing budgets because of rising inflation and costs.

Revenue at Alphabet’s fast-growing Google Cloud division rose 38% to $6.9 billion, but the division still recorded a net loss of $699 million compared with a loss of $644 million a year earlier.

Alphabet CEO Sundar Pichai told investors that the team is “intensifying our focus on a clear set of products and business priorities”.

The strong U.S. dollar has cut revenue growth by 5 percentage points, according to Ruth Porat, chief financial officer, who said the company is “working to realign resources.” force to drive our highest growth potential.”

Alphabet’s earnings set the stage for Facebook’s parent Meta, which reported results on Wednesday, with analysts expecting its revenue to fall 5% in the third quarter.

Additional reporting by Anna Nicolaou

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