Google Parent's Shares Dive, Ad Revenue Slowdown

Google’s once-untouchable online-advertising operation took a body blow, hurt by mounting competition and struggles within its increasingly high-profile YouTube unit, reports The Wall Street Journal.

Google parent Alphabet Inc. in the first quarter posted its slowest revenue growth since 2015. For all its myriad arms and efforts to diversify, Google remains essentially an old-fashioned billboard operation with a high-tech gloss—and it now faces more rivals.

The company’s results are an outlier amid what has otherwise been a steady earnings season in the technology sector. Peers like Facebook Inc. and Twitter Inc. previously posted strong earnings, while Amazon.com Inc. last week reported record profit that will allow it to pour fresh cash into improving its Prime membership program.

Alphabet shares fell 7% Monday after hours, with the drop picking up during the earnings call as executives declined to answer direct questions about the flagging growth. Nearly an hour in, one analyst, Ross Sandler of Barclays, audibly sighed. “I guess I’ll beat a dead horse on the deceleration,” he said.

WSJ Graphic

If Alphabet shares drop in regular trading on Tuesday to match the after-hours decline, that would wipe more than $60 billion from the company’s market capitalization and mark the worst single-day session in nearly seven years. Before the earnings report, shares were up 24% this year.

Alphabet reported first-quarter revenue of $36.3 billion, roughly $1 billion short of forecasts. Per-share earnings of $9.50 also disappointed, and were a substantial fall from a year earlier, when results were supercharged by the conglomerate marking up its stakes in private technology companies.

Growth slowed across the board. Revenues were up 17% year-over-year, compared with 26% in last year’s first quarter. The company’s margin, a constant concern for analysts and investors, fell to 18%, compared with 25% last year.

The crimped margin can in part be blamed on last month’s $1.7 billion fine from European regulators for abusing the dominance of its search engine and limiting competition. Excluding the fine, the company’s margin came in at 23% and its per-share earnings were $11.90.

The longer-term issue, however, is competition. Rivals like Amazon, once content to play in their own corners of the Silicon Valley sandbox, are making big plays at online advertising. In a potentially existential threat to Mountain View, Calif.-based Google, more online shoppers now begin their searches directly on Amazon than on search engines.

YouTube, perhaps the company’s most closely watched arm, remains a financial black box. Hailed as an inspired acquisition 13 years ago, Google still hasn’t broken out the unit’s results in an earnings report. That has left investors to piece for clues, as expensive forays into original programming and cable-television replacement services have thus far failed to pay off.