Inflation and competition slow Google in Q2

Google saw its net profit decline and its growth slow, but the market expected the worst amid tighter advertising budgets due to the economic crisis.

Net income for Alphabet, Google’s parent company, fell 13% year-over-year to $16 billion in the quarter, according to a statement Tuesday.

From April to June, the California group generated $69.7 billion in trading volume, an increase of 13%.

This is the weakest year-over-year revenue growth since the second quarter of 2020, when advertisers, particularly tour operators, abruptly closed their flood gates at the start of the pandemic.

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“It’s a good time to sharpen our priorities,” Sundar Pichai, president of Alphabet, said on a conference call with analysts. “It’s an opportunity to absorb and make sure we’re working on the right projects.”

He noted that advertising revenue and search engine cloud activity (remote computing) drove the group’s growth, with revenue of $40.7 billion and $6.3 billion, respectively.

And on Wall Street, the company’s title accounted for about 4% in post-close electronic trading.

The results of the world leader in online advertising were expected by the market as a kind of sector metric, especially after the results of Snap and Twitter last week.

“Unsafe”

The parent company of Snapchat fell 40% the following day to a financial performance considered disappointing, despite the noticeable increase in the number of users.

For its part, Twitter referred to “headwinds” in the sector, which contributed to achieving a net loss for the last quarter.

“Investors were expecting disaster for Alphabet, but in the end the numbers were a little better than they feared,” said Dan Ives of Wedbush Securities.

“After the Snap disaster, the growth in advertising at Google should boost confidence in the marketplace and the technology community,” the analyst said.

Fears

Evelyn Mitchell of Insider Intelligence noted that Google “is not immune to threats to the industry.”

She explained that the group was facing this quarter “unfavorable annual comparison, disruption of its activities in Russia and macroeconomic conditions that significantly reduce advertising budgets.”

Rampant inflation, high interest rates, and supply chain challenges have caused many companies to shrink their marketing budgets.

Even more worrisome for Alphabet, Meta (Facebook and Instagram) and Amazon, the habits that consumers have taken on during the pandemic appear to be less well established than the market had thought.

Online sales platform Shopify announced Tuesday that it will lay off 10% of its staff (about 1,000 people).

Because even if the e-commerce share has progressed well, it has returned to the level expected before the health crisis distorts the outlook of the Canadian group.

“saturate the market”

Existing social networks are also facing the emergence of young and very popular applications, starting with TikTok, which are rapidly devouring users’ attention with short and engaging videos of creators.

YouTube earned $7.3 billion, up just 4.8% year over year.

“For YouTube, competition only increased in the second quarter as TikTok released new products and ad formats,” said Evelyn Mitchell.

According to Insider Intelligence, Google is expected to generate approximately $175 billion in net ad revenue in 2022, or 29% of the global digital advertising pie.

Independent analyst Rob Enderle said Alphabet’s second-quarter results “show market saturation and a lack of cost control that is coming back to haunt them”.

The US group, which has more than 174,000 employees worldwide (+21% in one year), has recruited in all directions during the pandemic, as have its neighbors on the US West Coast.

But he recently announced a hiring slowdown for the rest of the year and even paused all new shows for two weeks, “to allow teams to prioritize,” according to a spokesperson.

Many other tech companies have decided to lay off employees (including Netflix and Twitter) or slow the pace of hiring, such as Microsoft and Snap.

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