Alphabet doesn’t rely entirely on advertising revenue, but it’s a significant part of Alphabet’s business. That’s unfortunate during a time of “sticky” inflation.
Financial market pundits like to declare that Alphabet is a cloud company now. Yet, let’s not forget that the company’s name was Google for a long time.
The search engine is what made the company a household name, and total Google Services revenue remains much larger than Google Cloud revenue.
In other words, ad revenue is still quite important to Alphabet’s business model. If that revenue source isn’t growing at a satisfactory pace, that’s bad news for Alphabet and a major problem for the company’s shareholders.
GOOG Stock Drops on Disappointing Results
If you’ve been an Alphabet investor for a while, you’ll probably remember what took place on Oct. 26. That’s when GOOG stock plunged from the previous closing price of around $103 to $94 and change.
This was among the worst single-session drops that Alphabet’s investors had experienced in a while. As you may already know, this took place the day after Alphabet disclosed its third-quarter financial and operational results.
GOOG stock had already been down sharply from its early-January price of around $145. Clearly, it’s been challenging for Alphabet and its investors to prosper when U.S. inflation has been so persistent.
After all, businesses are less inclined to spend money on digital advertising when inflation is elevated. Between high inflation and rising interest rates, many companies have been forced to curtail their ad-spending budgets.
Hence, if you expect inflation and high interest rates to continue for a while, this probably isn’t a great time to hold shares of Alphabet.
Ad Revenue Came in Below Expectations
Make no mistake about it: Financial traders watched closely for robust year-over-year growth in Google’s and YouTube’s third-quarter advertising revenue. They were undoubtedly disappointed, and this will help to explain why GOOG stock declined so sharply.
Google advertising revenue in Q3 2022 came in at $54.48 billion, demonstrating only a 2.5% YOY improvement. Furthermore, this result came in below analysts’ forecast of $56.9 billion.
At the same time, YouTube’s quarterly advertising revenue actually fell from $7.21 billion in the year-earlier quarter to $7.07 billion in Q3 of 2022. Analysts had modeled $7.5 billion, so this result was also a disappointment.
Moreover, from the year-earlier period to 2022’s third quarter, Alphabet spent more across multiple expenditure categories.
These included research and development, sales and marketing as well as general and administrative. Hence, Alphabet was spending more overall, but not getting impressive returns from its ad-revenue sources.
What You Can Do Now
Again, GOOG stock may be a worthy investment eventually. This is a time to be skeptical, however. It makes sense to wait for further developments to determine if Alphabet can spend less and improve its ad-revenue results.
Besides, it’s going to be challenging for Alphabet’s largely advertising-supported business to thrive while inflation is elevated. Therefore, due to macro-level and company-specific issues, there’s no urgent need to hold a position in Alphabet shares.
On the date of publication, Louis Navellier had a long position in GOOG. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.