Weaker advertising landscape and higher regulatory risk set to weigh on Alphabet’s second quarter

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Alphabet Inc. is expected to post another quarter of slower growth as macroeconomic headwinds and heightened regulatory scrutiny weigh on its core advertising business.

Fears over a potential recession are causing many companies to cut advertising budgets, which directly impacts Alphabet’s growth prospects. Google LLC’s parent company faces headwinds following tough comparisons to 2021, when its revenue growth exploded in part due to a rebound from early pandemic lows.

Alphabet is expected to post second-quarter revenue of $70.10 billion, up 13.3% from a year earlier, according to S&P Capital IQ estimates as of July 20. The expected growth rate is lower than 23% in the first quarter and significantly lower than Alphabet’s. performance until 2021.

“A challenging macro landscape and tougher comparisons will lead to a sharp deceleration in growth early next year,” said Angelo Zino, senior equity analyst at CFRA Research.

The advertising market is faltering

Alphabet’s Google advertising segment, its main revenue driver, generated $54.66 billion in the first quarter, up 22.3% year-over-year. The growth rate represented a deceleration from the past three quarters, and analysts expect this trend to continue.

“In what we believe is the first of many adjustments to our estimates given deteriorating viewability, we are lowering our forecast for Google’s advertising business as we receive feedback from marketers about lower budgets due to macro uncertainty”,Stephen Ju, analyst at Credit Suisse wrote in a recent analyst note on the company.

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Google’s search segment should show more resilience.

“While the second quarter may see bumps from Russia/Ukraine, COVID-19-related constraints in China, and supply chain headwinds, we believe Google’s search business is better positioned than its peers who also had to deal with other noises like Apple. [Inc.]ad tracking has changed from a year ago,” said CFRA Zino.

Regulatory risks

Alphabet is also facing growing pressure from regulators seeking to curb the company’s market power in online search and advertising businesses. The company is facing at least two dozen antitrust investigations in the United States and around the world, including several in the European Union.

The Wall Street Journal reported earlier this month that Google had proposed to spin off parts of its ad tech business into a separate unit under the Alphabet umbrella in a bid to appease US antitrust authorities. It was unclear whether that would be enough to address concerns raised in an ongoing US Justice Department lawsuit alleging the company has a monopoly in the search advertising market.

“I do not know what [proposed business split] is accomplishing in terms of ameliorating people’s concerns about Google having such an outsized share at all levels of the ad tech stack,” said Jesse Lehrich, co-founder of Accountable Tech, a group that advocates for regulation and reform of tech giants.

A more serious concession would be for the company to sell the ad segment to a third party or allow the purchase of ads outside of its own ad agencies, Lehrich added.

A Google spokesperson declined to comment on the matter.

In 2008, the United States Federal Trade Commission green light for Google’s purchase of After an eight-month investigation, DoubleClick Inc. concluded that the deal was unlikely to significantly lessen competition. This case helped propel Alphabet into the search advertising dominance it has today, said Tejas Dessai, internet research analyst at Global X ETFs, an exchange-traded fund research firm based in New York.

“Proving that Google is acting in a way that harms the market and the end consumer is going to be a bit tricky,” Dessai said.

Alphabet shares are down 21.1% year-to-date as of the July 21 market close, in line with declines seen by the tech-heavy Nasdaq.

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Cloud growth

Outside of advertising, Alphabet’s Google Cloud segment remains a fast-growing part of the company’s business and the largest source of non-advertising revenue. The segment, which includes Google’s infrastructure and platform services, collaboration tools and other services for enterprise customers, posted 43.8% year-on-year revenue growth another to reach $5.82 billion.

CFRA predicts Google Cloud grew 37% in the second quarter and expects a similar growth rate for the second half.

“Cloud still only represents 9% of revenue, but remains by far the most important growth driver, in our view, as the economy grinds to a halt,” Zino said.

Although Google Cloud remains unprofitable, with an operating loss of $931 million in the first quarter, Zino expects the company to achieve profitability within the next eight to 12 quarters.

Credit Suisse expects the cloud segment to grow 31% in the second quarter, but Ju said that forecast may prove conservative given the secular tailwinds among cloud providers.

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