Google ad revenue is a huge driver of Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) stock, accounting for nearly 85% of total revenue. The company reported its Q1 2019 earnings yesterday evening and the result was a bloodbath for GOOGL. Google ad revenue grew at its lowest rate since 2015, while online advertising rivals Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) both recently posted big ad revenue gains. As a result of fear that advertisers are shifting their spending to the competition, Alphabet stock — which had closed Monday at record highs — is down 8% as of this writing.
Alphabet Stock Hammered by Google Ad Revenue Growth
Alphabet’s Q1 2019 earnings were released on Monday evening, with the company reporting revenue of $36.3 billion, up 17% over the previous year. The company announced:
“We remain focused on, and excited by, the significant growth opportunities across our businesses.”
Investors were focused on growth as well, in particular growth in Google’s ad revenue business. It was pegged at $30.7 billion, up from $26.6 billion in Q1 2018. That’s a 15% growth rate on the year for Google ad revenue, which sounds impressive, except a year ago the company notched 24% growth. Q1 2019 marks three straight quarters where Year-over-Year Google ad revenue growth has been slowing, and that looks disturbingly like a trend.
Alphabet stock dropped after the earnings report was released, and it’s currently down nearly 8% in pre-market trading.
As Bloomberg points out, the concern over slowing growth in Google ad revenue is being fanned by recent reports that online advertising rivals are having greater success. Facebook reported 26% growth in its ad revenue last week. Amazon has been ramping up its efforts to sell ads online and on its mobile app, and that is paying off. The company’s “Other” segment, which is primarily made up of advertising, saw first quarter revenue growth of 34%.
Slowing Google ad growth is worrisome, but there is even more room for concern if deep-pocketed rivals are on an upward trend, potentially threatening to eat into a market that Google dominates.
Poor Smartphone Sales Aren’t Helping
The performance of Google’s ad revenue business is a big concern for investors, but it doesn’t help that hardware sales are still not at a level where they are significant enough to take the pressure off.
This quarter, Google notched $5.4 billion in “Other” revenues, which is made up of hardware including Nest home security products, Google Home smart speakers and the Google Pixel smartphones. Those smartphones in particular have once again failed to catch fire. With declining global demand, Google is facing an uphill battle as it is, but the market for premium smartphones is especially tough.
As a result, Alphabet admitted in its earnings call that Pixel sales are down compared to last year. The company is working on cheaper, mid-range Pixel smartphones expected to be called the Pixel 3a and Pixel 3a XL, due to be unveiled in early May in an effort to boost its smartphone sales.
No Easy Fix Amid Increased Competition
Despite the many businesses Alphabet is involved with — including cloud computing, smartphones, smart speakers and media streamers — Google ad revenue still accounts for some 85% of the money coming through the door. Alphabet has been working to develop other lines of business that take the pressure off, but nothing comes close at this point.
The market for online advertising remains healthy and U.S. advertisers are on track to spend $129 billion on online ads this year. However, the hit to GOOGL stock reflects a realization that the company has a fight on its hands to keep Google ad revenue growing at the accustomed pace. Ad spending may be increasing, but competition from Facebook and Amazon is growing as well.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
