Shares of Google-parent Alphabet are down sharply after the company’s latest earnings report reveals the slowest quarter for revenue growth in almost a decade.
Google’s year-over-year (YOY) revenue growth is up 6%, the smallest increase since 2013, aside from one month during the pandemic.
It may seem like a good thing that Google’s revenue is up overall, but the problem becomes evident when you compare it to last year’s growth of 41%.
Google’s operating margin is down from 32% last year to 25% this year, and net income is down 36% YOY.
As Google fell short of expectations, revenue and earnings per share (EPS) were weaker than analysts predicted.
As the below data illustrates, the only category where Google beat estimates is cloud revenue:
- EPS: $1.06 vs. $1.25 expected (according to Refinitiv estimates).
- Revenue: $69.09 billion vs. $70.58 billion expected (according to Refinitiv estimates).
- YouTube advertising revenue: $7.07 billion vs. $7.42 billion expected (according to StreetAccount estimates).
- Google Cloud revenue: $6.9 billion vs. $6.69 billion expected (according to StreetAccount estimates).
- Traffic acquisition costs (TAC): $11.83 vs $12.38 expected (according to StreetAccount estimates).
Before the earnings call, Alphabet was expected to post the slowest revenue growth in two years. It was the slowest revenue growth for any quarter since 2013.
Google & YouTube Ad Spend Slowing Down
The biggest news of the earnings call is the deceleration in Google’s digital ad revenue.
Google’s digital ad revenue grew only 2.5% in Q3. At least it went up, as the same can’t be said for YouTube.
YouTube ad revenue fell to $7.07 billion, down 2% YOY and missing analysts’ expectations of $7.42 billion.
This is the first-ever drop in YouTube ad revenue since Alphabet reported it in 2019.
Ruth Porat, Alphabet CFO, stated during the earnings call:
“On the second quarter earnings call, we noted a pullback in spend by some advertisers in YouTube and Network, and these pullbacks in spend increased in the third quarter. In Search and Other, the largest factor in the deceleration in Q3 was lapping the outsized performance in 2021. In the third quarter, we did see a pullback in spend by some advertisers in certain areas and search ads. For example, in financial services, we saw a pullback in the insurance, loan, mortgage, and crypto subcategories.”
YouTube’s ad revenue peaked at 84% in Q2 2021. A year later, it’s down to negative 2%.
The sharp drop in ad spending on YouTube and Google coincides with a similarly steep decline in the prices of cryptocurrencies.
This is worth noting, as Porat says crypto is a subcategory where advertisers are pulling back their spending.
Bitcoin reached record highs in 2021, right around the time when YouTube experienced its highest-ever recorded revenue growth. The cryptocurrency crashed in Q2 2022, which lines up with the decline in ad revenue reported by Porat.
In today’s economy, it’s understandable that companies are slowing down ad spending. A looming recession means a shift away from capital expenditure to capital preservation.
If you run a monetized YouTube channel, your ad revenue may decline if it hasn’t already.
Now is the time to start thinking about ways to diversify your income.
On YouTube, that could include selling merchandise, offering channel memberships, or broadcasting live. Those are all ways to make money without relying solely on ads.
It won’t surprise me if creators’ livestream revenue starts outpacing their ad revenue. Anecdotally speaking, I’ve seen independent YouTube content creators pull in thousands of dollars per stream from money donated by viewers through Super Chats.
You can also start preparing for the monetization of YouTube Shorts in 2023. Getting comfortable with creating entertaining and informative short-form videos may help your channel bring in more revenue when Shorts ads roll out.
Sources: CNBC, Motley Fool, Alphabet (PDF link)
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