Alphabet’s Falling Ad Revenue Could Overshadow Cloud Growth

The search giant is expected to report a third consecutive quarter of declining earnings on Feb. 2

A woman passes a large sculpture of the Google logo at the first China International Import Expo (CIIE)


Key Takeaways

  • Google's parent company is likely to say fourth-quarter ad revenue fell 1% for only the second time in the last decade.
  • Alphabet's cloud business is expected to maintain double-digit growth, keeping pace with rivals Amazon and Microsoft.
  • Two separate antitrust lawsuits, one filed last week and another going to trial in September, cast uncertainty over digital ad dominance.

Alphabet Inc. (GOOG; GOOGL)’s advertising revenue likely fell on a year-over-year basis for only the second time in more than a decade in the fourth quarter, as the company grapples with a slowdown in digital ad spending and prepares to fend off multiple antitrust lawsuits.

Google-parent Alphabet is expected to report its third consecutive quarter of declining earnings, with forecasts compiled by Visible Alpha predicting diluted earnings per share of $1.48, an almost 13% decline from the prior year. Total ad revenue is seen shrinking 1% to $60.5 billion, weighed on by declines of nearly 5% in Youtube advertising and more than 3% on its Google Network. Alphabet reports its fourth-quarter earnings after markets close on Thursday.

Alphabet’s expectations underscore the dire situation facing the tech industry, which is recalibrating after a pandemic boom in online shopping and rock-bottom interest rates sent profits, headcounts, and valuations soaring. Alphabet became the third tech mega cap, after Microsoft (MSFT) and Amazon (AMZN), to announce layoffs in January when it cut 12,000 jobs, or about 6% of its global workforce. CEO Sundar Pichai wrote in a letter to staff that the layoffs came amid “a different economic reality” than the one that fueled its explosive growth during the pandemic.

Digital advertising, which accounted for more than 80% of Alphabet's revenue in 2021, suffered a significant slowdown last year as advertisers responded to falling consumer demand and fear of a recession. Market research firm Insider Intelligence cut its forecast for 2022 digital ad spending by $35 billion, or nearly 6%, in November. Alphabet, however, may be in a better position than many of its competitors by virtue of its search-driven ad business, which is more resilient than display advertising.

“Google has an edge over its other ad-reliant competitors in an economic downturn, as advertisers facing budget cuts typically prioritize lower-funnel channels with higher ROI like search,” according to Evelyn Mitchell, an analyst with Insider Intelligence.

Alphabet Inc. Key Stats  Estimate for Q4 2022  Q4 2021  Q4 2020
Earnings Per Share ($) 1.48 1.7 1.24
Revenue ($B)  76.6  75.3 56.9
Google Services Revenue ($B)  68.9 69.4 52.9

Source: Visible Alpha

The company's cloud business could also be a bright spot when it reports Thursday. Fourth-quarter cloud revenue is forecast to grow by 33% to $7.4 billion, a two-fold increase from the end of 2020. Still, Alphabet has a long way to go to unseat leaders Microsoft, which last week reported cloud revenue grew 22% to $27.1 billion, and Amazon. “Google has to grow more than 50% a year to play catch up,” said Constellation Research analyst Ray Wang.

Alphabet shares have fallen almost 27% in the past year despite a rebound in January. By comparison, the S&P 500 Information Technology Sector has fallen 16.5% over the last 12 months.

Comparison of total return of Google Class A (GOOGL) shares and the S&P 500 IT Sector index between Jan. 31, 2022, and Jan. 31, 2023.
Source: TradingView.

Post-Earnings Performance

An earnings beat or miss may not be the sole basis for a stock moving higher or lower immediately after earnings are released. Many stocks end up losing ground despite an earnings beat due to other factors that disappoint investors, such as a poor outlook on future growth expectations, non-profit factors like DAUs (tech companies), load factors (airlines), etc. Similarly, unforeseen catalysts, like positive forward guidance or even oversold market conditions leading up to earnings can help a stock’s price gain despite an earnings miss.

Over the past 12 quarters, Alphabet Inc’s adjusted EPS has beat consensus expectations eight times. Shares only ended the next trading session higher in five of those quarters. The average post-earnings move was 0.88%.

Although past performance is no guarantee of future results, the following graph shows the distribution of Alphabet Inc’s stock price performance on the trading day following its last 12 quarterly earnings announcements. This information provides active traders with context regarding how the stock price might react on the day following its next earnings release.

Legal Trouble Ahead

Alphabet faces several legal challenges in the coming year. The U.S. Justice Department filed an antitrust lawsuit against Google last week, alleging the company has thwarted competition in the digital advertising space by “eliminating ad tech competitors through acquisitions” and leveraging its dominant position to force publishers and advertisers to use its products. Attorney General Merrick Garland called the company’s tactics “anticompetitive, exclusionary, and unlawful.”

In an official response, Google’s Vice President of Global Ads, Dan Taylor, accused the DOJ of attempting to “pick winners and losers in the highly competitive advertising technology sector.” He called the Justice Department’s order that Google divest from its publisher ad server and ad exchange, both developed through FTC-approved acquisitions, an attempt “to rewrite history at the expense of publishers, advertisers, and internet users.”

Alphabet was previously targeted by the Justice Department in 2020, when it filed an antitrust suit over Google’s alleged search and search advertising monopoly. That lawsuit is scheduled to go to trial in September.

Article Sources
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  1. Google. "A difficult decision to set us up for the future."

  2. Insider Intelligence. "Insider Intelligence Slashes Global 2022 Ad Spend Forecast By Nearly 6%."

  3. Microsoft. "Microsoft Cloud strength drives fourth quarter results."

  4. "Alphabet pins hopes on Google Cloud as ad revenue growth declines."

  5. The United States Department of Justice. "Justice Department Sues Google for Monopolizing Digital Advertising Technologies."

  6. Google. "DOJ's lawsuit ignores the enormous competition in the online advertising industry."

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