Inflation and competition slow Google down in Q2

Google saw its bottom line decline and its growth slow, but the market expected worse amid tighter advertising budgets due to the economic crisis.

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

From April to June, the Californian group achieved 69.7 billion dollars in turnover, an increase of 13%.

This is the weakest year-on-year revenue growth rate since the second quarter of 2020, when advertisers abruptly closed the floodgates at the start of the pandemic, in particular tour operators.

Barometer

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

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

On Wall Street, the title of the company took about 4% in electronic trading after the close.

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

“Not Safe”

The parent company of the Snapchat application plunged 40% the day after financial performance deemed disappointing, despite a notable increase in the number of users.

Twitter for its part noted “headwinds” in the sector, which contributed to a net loss for the past quarter.

“Investors were expecting disaster for Alphabet, but ultimately the numbers were slightly better than they feared,” said Dan Ives of Wedbush Securities.

“After the Snap disaster, the growth of advertising at Google should give the market and the tech community a bit of a boost in confidence,” the analyst said.

Concerns

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

The group was facing this quarter “an unfavorable annual comparison, the disruption of its activities in Russia and macroeconomic conditions that are drastically reducing advertising budgets”, she detailed.

Rampant inflation, rising interest rates and supply chain difficulties are leading many companies to scale back their marketing budgets.

Even more worrying for Alphabet, Meta (Facebook, Instagram) and Amazon, the habits taken by consumers during the pandemic seem less entrenched than the market had believed.

The online sales platform Shopify announced on Tuesday that it was laying off 10% of its employees (around 1,000 people).

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

“Market saturation”

Established social networks are also facing the rise of young, ultra-popular apps, starting with TikTok, which is rapidly eating away at users’ attention with its short and captivating creator videos.

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

“For YouTube, the 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 reap nearly $175 billion in net advertising revenue in 2022, or 29% of the global digital ad pie.

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

The American group, which has more than 174,000 employees worldwide (+21% in one year), recruited in all directions during the pandemic, like its neighbors on the west coast of the United States.

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

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

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