Alphabet sent a tremor through the worlds of digital advertising and ecommerce as it reported an unexpectedly severe slowdown in its core search ads business, prompting a sell-off in tech stocks and fanning fears of an economic slowdown in the US.
Third-quarter revenues at the largest seller of digital advertising in the US grew by 6 per cent to $69.1bn. It was the slowest rate of growth in more than two years and fell short of analyst expectations for an increase of 9 per cent, according to Refinitiv.
“It’s a bad omen for digital advertising at large,” said Evelyn Mitchell, analyst at Insider Intelligence. “This disappointing quarter for Google signifies hard times ahead if market conditions continue to deteriorate.”
Alphabet’s stock fell by 6.3 per cent in after-hours trading on Tuesday following the lacklustre results, which sparked a sell-off in shares of other tech companies including Meta and Amazon, down 3.5 per cent and 1.4 per cent, respectively. Microsoft, which also reported earnings on Tuesday, shed 2 per cent.
Google Search revenues grew 4.2 per cent to $39.5bn, missing forecasts for 8 per cent growth, while YouTube advertising revenues fell by 2 per cent to $7.1bn versus analyst expectations for an increase of 4.4 per cent. It was the first decline for YouTube ad sales since the company started reporting its performance separately in 2020.
Alphabet reported diluted earnings per share of $1.06 for the quarter versus $1.40 in the same period last year and lower than the $1.25 expected by analysts.
The poorly received results were the latest sign of a slowdown in digital advertising and the world’s largest economy more broadly as consumers and businesses pull back on spending at a time of soaring inflation. Marketing budgets are often the first port of call for companies trying to cut costs.
Earlier on Tuesday, a closely watched gauge of consumer confidence fell to its lowest level in over a year. The so-called present situation index, published by the Conference Board, declined to 138.9, the weakest reading since April 2021.
Lynn Franco, a senior director at The Conference Board, said the sharp fall in the index suggested economic growth had slowed at the start of the fourth quarter and described consumer expectations as “dismal”.
Spotify, the audio streaming group that counts the US as its largest market, on Tuesday said a “challenging” economic environment had also hit its advertising sales in the third quarter, contributing to wider losses despite solid growth in its core business of selling subscriptions.
And last week, shares of Snapchat’s parent company lost nearly a third in value after it said advertisers were continuing to cut marketing budgets because of inflation and rising costs.
Revenue at Alphabet’s fast-growing Google Cloud unit increased 38 per cent to $6.9bn but the division still recorded a net loss of $699mn compared with a loss of $644mn a year before.
Alphabet chief executive Sundar Pichai told investors the group was “sharpening our focus on a clear set of product and business priorities”.
The strong US dollar knocked 5 percentage points off revenue growth, according to Ruth Porat, chief financial officer, who said the company was “working to realign resources to fuel our highest growth possibility”.
Alphabet’s earnings set the stage for Facebook parent Meta, which reports results on Wednesday, with analysts expecting its revenues to have slipped by 5 per cent in the third quarter.
Additional reporting by Anna Nicolaou