Alphabet’s Profit Falls, But Advertisers Are Sticking With Search (original) (raw)

Alphabet missed earnings per share (EPS) and revenue expectations in Q2 2022, reporting EPS of 1.21vs.1.21 vs. 1.21vs.1.28 expected and revenue of 69.7billionvs.69.7 billion vs. 69.7billionvs.69.9 expected. The company’s profit dropped 14% compared to Q2 2021, when Alphabet benefitted from a surge in spending caused by the post-pandemic reopening. Despite missing expectations, Alphabet’s search engine business proved resilient in the face of rising inflation and economic uncertainty. However, YouTube and the Google Display Network fell prey to the advertising market’s broader decline.

Here are a few takeaways from today’s earnings release and call:

Search is resilient in the face of economic turbulence . Despite Ruth Porat’s reference to “pullbacks in spend by some advertisers” due to rising inflation, supply chain challenges, and slowing economic growth, Alphabet’s search ad sales grew more than 13% in Q2 2022 to 40.7billion,beatinganalysts’expectationsof40.7 billion, beating analysts’ expectations of 40.7billion,beatinganalysts’expectationsof40.2 billion. Search sales were lifted by travel and retail queries. However, travel queries may fall as Forrester’s June 2022 Consumer Energy Index And Retail Pulse Survey signals: Four in 10 consumers anticipate spending less on leisure travel in the next three months. For now, search is less vulnerable to budget cuts than YouTube and the Google Display Network.
YouTube posted its slowest growth in more than two years. YouTube’s ad revenue grew just 4.8% in Q2 2022, missing Wall Street expectations of 7%. This is modest compared to its extraordinary 84% YOY growth reported in Q2 2021. Going forward, YouTube faces serious challenges. YouTube Shorts, YouTube’s TikTok-like video product, has more than 1.5 billion monthly logged-in users but is cannibalizing viewership of longer-form videos, softening YouTube’s ad revenue. Furthermore, time spent with TikTok, particularly among the 18- to 24-year-old demographic, reduces YouTube’s share of mobile viewing. According to Cowen, 40% of 18- to 24-year-olds cite YouTube as the platform they use most often for mobile video, down from 48% in Q2 2021. TikTok is the second-most-used platform, with 22% of respondents. Of note: YouTube’s ad revenue doesn’t include subscription revenue from YouTube TV, which has more than 5 million subscribers, making it bigger than Hulu and, in fact, the largest internet-based pay TV provider in the US.
Traffic acquisition costs continue to rise. In Q2 2022, Alphabet’s traffic acquisition costs (TAC) were lower than expected — 12.21billionvs.12.21 billion vs. 12.21billionvs.12.41 billion — but TAC still rose 12% compared to Q2 2021. Alphabet pays TAC to device makers like Apple to make Google the default search engine. TAC will continue to rise as mobile search grows. Apple could be getting as much as 9billionofthat9 billion of that 9billionofthat12.21 billion, making up more than 20% of Apple’s services revenue.

What does this mean for B2C marketers? Despite its slowing growth, YouTube remains a source of optimism and experimentation for Alphabet. Philipp Schindler, Alphabet’s chief business officer, mentioned that “new live commerce features,” like YouTube’s partnership with Shopify, are being tested to more effectively connect brands with creators and deliver value “at both ends of the funnel.” This innovation matches our prediction about interactive video ads accelerating the rise of shoppable experiences. As you invest in performance marketing channels like search and digital video, bear in mind the halo effects that channels have on each other. For guidance on how to take advantage of these halo effects, schedule a guidance session.

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Alphabet’s Profit Falls, But Advertisers Are Sticking With Search (original) (raw)

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