Alphabet’s Ad Business Slows, But Investors Aren’t Listening
Google's parent company Alphabet NASDAQ:GOOG reported earnings today, and while the company ended the quarter in the black, its CFO warned that the business had a significant slowdown in March and will likely see further losses as the year goes on.
Alphabet posted revenue of $41.16 billion for the quarter, ahead of expectations of $40.33 billion. Per-share profit came in at $9.87 while analysts expected $10.38. Overall advertising revenue from YouTube hit $4.3 billion, while cloud revenue came in at $2.78 billion. Shares of Alphabet initially rose up to 7% during after-hours trading, but they slid back down to decline by 3% by mid-afternoon Asia time.
During Alphabet's earnings, its CFO, Ruth Porat said that "performance was strong during the first two months of the quarter," however after March the company had a dramatic slowdown in advertising revenue. Investors were likely encouraged by the fact that Alphabet beat expectations, hence the initial uplift in the stock price, but were spooked by Porat's comments that the worst is yet to come.
Alphabet CFO Ruth Porat said repeatedly DO NOT EXTRAPOLATE the April month-to-date comment of not seeing a further y/y deterioration for ad revenue since the end of March. Can you guess what investors are doing? 🙃 pic.twitter.com/Ue2Nj0VaRj
— tae kim (@firstadopter) April 28, 2020
“Given that it is such an unprecedented environment, I wouldn’t extrapolate from these comments for a full quarter,” Porat said during an earnings call.
An Alphabet Soup of Headwinds
Even though watch time is up on YouTube, and traffic growing on Google, Alphabet executives noted that budgets for ad campaigns from major clients aren't what they used to be. For instance, Expedia recently disclosed that its overall advertising budget for the year won't crest $1 billion whereas it usually spends around $5 billion. Mark Mahaney, an analyst at RBC Capital Markets, predicted that rival travel site Booking.com would only spend approximately $1-2 billion on ads this year.
All this comes as Alphabet reports traffic acquisition costs were up 8.6% to $7.45 billion. Alphabet is becoming a more expensive company to run as costs for traffic are up, while revenue trickles downward.
How Will This Impact Online Media?
The group that's most likely to feel the impact from all of this is online media. Even before Alphabet announced earnings, YouTubers and other online media creators were reporting that their ad rates had dropped substantially. Anecdotally, many YouTubers have reported that their CPM payouts have dropped by 30-50% for March and April.
At the same time, another vital revenue source for content creators is also being cut: Amazon Affiliate payouts. As Wccftech has already reported, these programs -- where Amazon pays for traffic websites send its way -- was in the process of being axed for the largest websites, a new report says that this will be expanded. According to The Verge, Amazon is cutting commission rates across the board by 50%. This means that media companies will be hit with the double-doozy of reduced CPMs from Google and less commissions from Amazon. All while traffic is up.
Expect some major consolidations in the space as media companies join forces to fight this with scale. It will also provide ample space in the market for alternatives to emerge and fight against Amazon's dominance.
Alphabet is currently trading at $1330 in the after hours market.
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