Alphabet Inc (NASDAQ:GOOGL) has been attracting the wrong sort of attention lately. There have long been doubts about the effectiveness of major online advertising platforms. Facebook Inc (NASDAQ:FB), for example, has dealt with claims that many of its users are bots over the years and that advertisers often pay to get low-quality clicks from emerging markets. Largely, though, GOOGL stock has remained free from these concerns. At least until now, that is.
This year is bringing increasingly troubling signs for Google’s mainstay advertising business. While Alphabet has plenty of other ventures in play, including the potentially game-changing Waymo, paid search is still the cash cow here. And given recent developments, GOOGL stock owners should proceed with caution here.
Useless Keywords Can Hurt Googl Stock
Gary Friedman, the CEO of Restoration Hardware (NYSE:RH) raised some eyebrows recently with his comments on digital advertising. In particular, he revealed that the vast majority of the firm’s advertising on Google is highly ineffective.
Friedman stated that: “We’ve found out that 98% of our business was coming from 22 words. So, wait, we’re buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it’s the word Restoration Hardware and the 21 ways to spell it wrong, okay?”
He went on to discuss a meeting he had with his marketing team. They warned him that peers might try to buy the Restoration Hardware keyword to “squat” on their name. However, as Friedman suggested, a customer that searches for Restoration Hardware is unlikely to go to Pottery Barn even if the competitor does buy an ad on Google. Restoration Hardware canceled all their Google ad-spend, and Friedman ominously suggested that: “A lot of [retailers] are going to go, holy crap. They’re going to look at their investments. They’d go, maybe we don’t need to buy our own name. Google’s market cap might go down.”
World’s Leading Multinationals Scaling Down
Both Unilever plc (ADR) (NYSE:UL) and Procter & Gamble Co (NYSE:PG) have long complained about the opaque digital advertising world. Earlier this year, according to Ad Age, for example, P&G’s Chief Brand Officer, Marc Pritchard pulled no punches. Pritchard stated that: “The days of giving digital a pass are over […] It’s time to grow up. It’s time for action.” Pritchard noted that P&G had given digital advertisers a year to clean up their act, but that little had changed, leading him to state that P&G won’t: “want to waste time and money on a crappy media supply chain”.
This declaration came in January. By summer, according to MediaRadar, P&G had in fact slashed its digital ad spend 41% year-over-year, with Unilever chopping an astounding 59% of its digital ad spend.
For many years now, digital advertising got a free pass from many multinationals since it was viewed as the fresh new thing. Any brand not big on digital would face the threat of losing millennials and appearing old-fashioned. However, sooner or later, the advertising has to convert to sales. And it simply hasn’t.
The Wall Street Journal reported in July that P&G’s advertising cuts haven’t impacted sales. In fact, CEO David Taylor said that the company hasn’t witnessed a reduction in its growth rate since slashing more than $100 million in digital ad spend. He concluded that: “What that tells me is that the spending we cut was largely ineffective.” The impact on GOOGL stock could be severe if more CEOs take this message to heart. One of the firm’s core competencies is under serious fire.
Objectionable Content
It wouldn’t be fair to say that Google has ignored these problems entirely. Advertisers have long complained about their ads being shown against controversial content on outlets such as YouTube. It’s no secret that many of YouTube’s top channels use foul language, are highly political and sometimes have racist, sexist and pro-terrorist comments, among other anti-social traits. These are not the sorts of outlets that all-American brands typically want to associate themselves with.
Shortly after various popular brands boycotted YouTube, Google cracked down, demonetizing many of the site’s leading controversial creators and videos in what’s been deemed the “Adpocalypse.” Many top creators claimed their ad revenues from YouTube dropped 80% or more in the wake of the crackdown on controversial content. This has curtailed the output of numerous top YouTube channels, while leading creators to other sources of funding, such as Patreon, subscriptions, or selling their own ads. Can Google make its creators happy without driving the advertisers away? It’s a fine line.
Google Will Have To Evolve
The internet is a messy place. It’s far from the sanitary TV and radio environments that brands long relied upon. In the past, a prime time TV program would have viewers because one of the leading networks had declared it to be must-see TV. And they’d ensure the content was tame enough that most national advertisers would be fine associating their brands with it.
Online, however, anything goes. And the stuff that offends the most people tends to go viral the most easily. Google, through its outlets such as YouTube, had been operating under the radar. But now that giants such as Unilever and P&G are running a fine comb through their advertising expenses, Google will now have to prove that their advertising is cost effective and reaching real potential consumers.
Just last month, Google was compelled to return funds to hundreds of advertisers for fraudulent ads. These ads, primarily in video format, appear to have been only seen by bots. Google only refunded around 10% of the purchase price for these defective ads, saying that the rest of the money had already been passed along to content creators. That’s unlikely to sit will advertisers, who are now demanding more detailed data.
Millennials spend a lion’s share of their time on the internet. As such, advertisers will have to continue their efforts online, whether they like it or not. But after years of avoiding scrutiny, companies like Google will now aggressively have to cut down on fraud and increase their efforts to deliver tangible results. This will hit margins on ad sales, and likely represent a long-term headwind for GOOGL stock. The golden age for Google’s advertising growth is now behind us. GOOGL stock currently is trading down about 7% from its all-time high. It could fall a lot farther if more advertisers cut back on their digital spend.
At the time of this writing, the author owned shares of UL stock. He had no position in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.
