Alphabet Inc. (GOOGL) advertising revenue will likely take a massive hit in 2020, with thousands of companies under financial stress forced to cut back to keep their balance sheets in the green. This is a big deal for the tech giant because those receipts comprise the vast majority of total revenues (see: How Alphabet Makes Money), raising doubts about the stock's capacity to recover heavy losses posted in the first quarter decline.
Needham's Laura Martin warned in March that travel industry ad spending would drop $3 billion in the second quarter, with the Google search engine taking the biggest hit. This business segment accounted for 10% of Google's ad revenue and $10.7 billion of total revenue in 2019. Expedia Group, Inc. (EXPE) Chairman Barry Diller highlighted this challenge on Thursday, warning that just $1 billion would be spent on advertising in 2020 compared to $5 billion in prior years. Note: Diller is also Chairman and Senior Executive of Investopedia/Dotdash parent, IAC/InterActiveCorp (IAC).
The hospitality industry will reduce ad spending as well in coming quarters, with thousands of small- and medium-sized restaurants likely to go bankrupt as a result of the pandemic. Other mainstream industries will be cutting back in future quarters as well when they discover that sales have failed to return to pre-crisis levels. None of this bodes well for Alphabet shareholders, who could face the stock's first major downtrend since the bottom dropped out in 2008.
GOOGL Long-Term Chart (2004 – 2020)
The company came public in August 2004, opening at a split-adjusted $50.01, and entered a strong uptrend that topped out just above $100 in November. It turned sharply higher in 2005, adding points at a rapid pace into the November 2007 top at $373.62. The stock relinquished more than two-thirds of its value during the 2008 economic collapse, finally bottoming out at $123.65 in November.
It took four years for the subsequent bounce to complete a round trip into the 2007 high, yielding an immediate breakout that eased into a rising channel in 2014. Price action held within those bullish boundaries until October 2018, when a decline undercut channel support for three months before a sustained recovery. Channel resistance has remained intact for the past six years, with the stock turning south after posting an all-time high above $1,500 at that level in February 2020.
The uptrend ended the long string of higher lows in December 2018, altering the stock's bullish character while setting up a major line of defense near $1,000. Price action has now tested that support level in 10 of the past 28 months, warning that the stock may be topping out after a decade-long bull run. Ominously, a sharp downturn in ad revenue could provide the strongly negative catalyst needed for a breakdown and the start of a secular downtrend.
The monthly stochastic oscillator entered a sell cycle from the overbought zone in February 2020, predicting relative weakness into the third quarter. The indicator is now traversing the panel's midpoint, indicating that bears remain in charge despite the strong bounce off the March low. The advance has now reached the underside of the broken channel, suggesting that it will have a tough time lifting above the $1,300 level.
GOOGL Short-Term Chart (2017 – 2020)
The on-balance volume (OBV) accumulation-distribution indicator ended a long-term accumulation phase in March 2018 and fell to a 16-month low in December. A steady recovery reached resistance in January 2020, triggering a breakout that failed with price in March. Even so, OBV held above levels posted during prior declines into $1,000, signaling mild progress that should delay a steeper slide.
In the shorter term, the bounce off the March low has now reached major resistance at the narrow alignment of the 50- and 200-day exponential moving averages (EMAs) as well as the 50% sell-off retracement and underside of the broken channel. A high-volume thrust above this barrier should draw widespread interest, but a reversal is more likely, exposing price to a test of the March low. Given the high stakes, current shareholders should tighten up stops while sidelined investors continue to sit on their hands.
The Bottom Line
A significant reduction in advertising revenues in coming quarters could signal the end of the multi-year uptrend for Alphabet stock.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.