Alphabet Inc (GOOGL) Stock Might Have a Chink in Its Armor

One of the key reasons Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — while it was still called Google — grew from nothing to an advertising behemoth in just a few years lies in the fact that much of what it offered was automated. Without the need for human intervention, it could cost-effectively offer ad space to advertisers with the click of a button (and payment, of course). This did wonders for GOOGL stock.

Alphabet Inc (GOOGL) Stock Might Have a Chink in Its Armor

There does come a time, however, when a “hands off” approach to … well, pretty much everything can cause problems.

Alphabet stock holders were made well aware of that reality just last week when a couple of advertisers suspended their ad spending at YouTube when it was realized their advertisements prefaced some distasteful hate speech that surfaced at the popular online video venue.

In its defense, the company didn’t know. As was noted, ad placements are essentially automated. On the other hand, it’s arguable to say GOOGL should have known something like that could happen, and prevention measures should have been put in place. The debacle may force Alphabet to operate its advertising service with at least a little more human involvement.

A Big Mistake for GOOGL Stock?

Although several companies pulled the plug on their YouTube ads, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) were a couple of the bigger names that called it quits … at least for the time being.

There was no specific event that prompted the boycotts, nor is it a brand new realization. But, the matter had been boiling over for a couple of weeks now, with an anti-Semitic clip video called “Jewish World Order” serving as the poster child of how vile the digital video venue can be, and how damning the power of association can be to a brand.

It’s theoretically not supposed to happen. Aside from the fact that ads are intended to be targeted to a plausible potential customer, but knowing that automated filters aren’t perfect, human judgment can also play a role in determining the appropriateness of an ad placement. Still, that’s clearly not working either.

Alphabet responded:

“We don’t comment on individual customers but as announced, we’ve begun an extensive review of our advertising policies and have made a public commitment to put in place changes that give brands more control over where their ads appear. We’re also raising the bar for our ads policies to further safeguard our advertisers’ brands.”

It’s the right thing to do, but a little too late.

Impact on Alphabet Stock

And it’s not just an embarrassing gaffe that will blow over, as most do. Nomura Instinet believes the advertiser boycott will shave $750 million off of the company’s top line over the course of the remainder of 2017.

That, however, isn’t much in the grand scheme of things.

YouTube was projected to drive $7.7 billion in revenue for that three-quarter stretch. Alphabet has done $90.3 billion in revenue for the last four quarters. Of course, inasmuch as YouTube isn’t profitable, the impact on the per-share profits of GOOGL stock may be nil.

Not all analysts are convinced the high-profile flub is going to do any lasting damage, however. Morgan Stanley calculates that the affected part of the company’s ad business only makes up 10% of the organization’s revenue machine, and boasts millions of advertisers. RBC Capital’s math follows up on Nomura’s calculation, pointing out that even in the event of a 10% lull in that arm’s revenue, it would still only translate into a 1.7% lull in total revenue.

Bottom Line for GOOGL Stock

It’s still not clear what, if anything, Alphabet specifically intends to do about the miscue and the subsequent fallout. And the plausible fiscal impact of the damage done is little more than guesswork at this point. Those matters, however, may be secondary.

While Google may still be the king of search and display ads and GOOGL stock is still one of the top picks in the industry, this is another dent in the company’s reputation — and its operation. The automated approach of pairing up ads and publishers was clever when it was the only option, but the whole business of internet advertising has changed. Alphabet stock didn’t change enough with it.

Case in point: Last year, an internet advertising arrangement called Header Bidding became all the rage. Facebook Inc (NASDAQ:FB) took that ball and ran with it … and customers love it. Rather than adapt on the future of digital display ads, GOOGL doubled down on its version of the ad-selling approach that distinctly lacks the transparency so many Header Bidding users love. Most observers expect Alphabet stock to lose market share as long as it refuses to face Facebook head-on.

None of this means GOOGL stock is doomed, but between being lapped by Facebook and now clearly being unable to guarantee appropriate ad placements to its biggest customers, investors should start to ask some tough questions about Alphabet’s sales and delivery model.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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