Key things
- Parent company Google is likely to say fourth-quarter advertising revenue fell 1% for only the second time in a 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 in September, cast doubt on digital advertising’s dominance.
Alphabet Inc. (GOOG; GOOGLEAdvertising revenue likely fell year-over-year in the fourth quarter for only the second time in more than a decade as the company grapples with a slowdown in digital ad spending and prepares to fend off several antitrust lawsuits.
Google parent Alphabet is expected to report a third straight quarter of declining revenue, with forecasts compiled by Visible Alpha predicting diluted earnings per share at $1.48, down nearly 13% from the previous year. Total advertising revenue fell 1% to $60.5 billion, driven by a nearly 5% decline 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 have boosted profits, headcount and valuations. The alphabet became the third technology mega hatafter Microsoft (MSFT) and Amazon (AMZN), to January to announce layoffs when it cut 12,000 jobs, or about 6% of its global workforce. CEO Sundar Pichai wrote in a letter to employees 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 fears of a recession. Market research firm Insider Intelligence in November cut its forecast for digital ad spending in 2022 by $35 billion, or nearly 6%. But Alphabet may be in a better position than many of its competitors thanks to its search-driven ad business, which is more resilient than display advertising.
“Google has an edge over its other ad-dependent competitors in the economic downturn because advertisers facing budget cuts tend to favor lower-funnel, higher-ROI channels like search,” says Insider Intelligence analyst Evelyn Mitchell.
| Key Statistics of Alphabet Inc | Estimate for Q4 2022 | Q4 2021 | Q4 2020 |
|---|---|---|---|
| Earnings per share ($) | 1.48 | 1.7 | 1.24 |
| Sales ($B) | 76.6 | 75.3 | 56.9 |
| Google Services Revenue ($B) | 68.9 | 69.4 | 52.9 |
Source: Visible Alpha
The company’s cloud business could also be a bright spot when it reports on Thursday. Fourth-quarter cloud revenue is forecast to rise 33% to $7.4 billion, double the growth since the end of 2020. Still, Alphabet has a long way to go to dethrone leaders Microsoft, which reported last week that cloud revenue grew by 22%. to $27.1 billion and Amazon. “Google needs to grow more than 50% a year to catch up,” Constellation Research analyst Ray Wang said.
Alphabet shares have fallen nearly 27% over the past year, despite a recovery in January. By comparison, the information technology sector of the S&P 500 is down 16.5% over the past 12 months.
Source: TradingView.
Performance after profit
An earnings beat or miss may not be the only basis for a stock to move higher or lower immediately after an earnings release. Many stocks end up losing ground despite earnings declines due to other factors that disappoint investors such as poor outlook on future growth expectations, non-profit factors such as DAUs (tech companies), load factors (airlines), etc. Similarly, unforeseen catalysts , such as positive forward direction or even oversold conditions in the market leading to profit, can help the share price rise despite the loss of profit.
Over the past 12 quarters, Alphabet Inc’s adjusted earnings per share have beaten consensus expectations eight times. The stock ended the next trading session higher in only five of those quarters. The average move after profit was 0.88%.
Although past performance is no guarantee of future resultsThe following chart shows the distribution of Alphabet Inc stock prices on the trading day following the announcement of the last 12 quarterly earnings. This information provides active traders with context on how the stock price might react the day after the next earnings release.
Legal trouble ahead
Alphabet will face several legal challenges in the coming year. The US Department of Justice filed the request antitrust lawsuit against Google last week, alleging that the company has thwarted competition in the digital advertising space by “eliminating ad tech competitors through acquisitions” and using its dominant position to coerce publishers and advertisers into using its products. Attorney General Merrick Garland called the company’s tactics “anti-competitive, exclusionary and illegal.”
In an official response, Google’s vice president of global ads, Dan Taylor, accused the Justice Department of trying to “pick winners and losers in the highly competitive ad tech industry.” He called the Justice Department’s order for Google to divest 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 previously targeted the Justice Department in 2020 when it filed an antitrust lawsuit over Google’s alleged monopoly over search and search advertising. That lawsuit is scheduled to go to trial in September.
