What’s Going On Here?Alphabet’s profit may have fallen short of expectations late on Tuesday, but its stock still made the grade, initially rising 3%. What Does This Mean?Alphabet’s overall revenue, made up mostly of Google’s advertising business, was a little higher than investors had forecast. That’s despite advertisers on its websites – which tend to be from “consumer cyclical” sectors like travel, autos, and retail – having yanked much of their ad spending in March. Not that it was much of a surprise, mind you: customer spending in those industries ebbs and flows with the economy’s fortunes. So even though user engagement on platforms like YouTube likely increased thanks to a homebound audience, travel firms like Booking.com – which normally spends $4 billion a year with Google – have, for obvious reasons, paused ads altogether (tweet this). Alphabet’s own costs, however, aren’t quite as flexible – meaning its quarterly profit came in lower than hoped. Why Should I Care?The bigger picture: You cut, we bleed.
Alphabet is America’s sixth-largest public company, and its decision to cut its marketing budget in response to coronavirus-strained revenues will have knock-on effects on the wider economy. Microchip-makers hoping for a boom ahead of the tech giant’s new smartphone launch later this year, for instance, might suffer. And sorry, chipmakers, but it gets worse: Apple’s reportedly delayed the manufacturing of its new flagship phone.
For markets: Looking for something long term.
Analysts expect Alphabet’s ad revenue to have accelerated by next year, once the global economy reopens and companies start vying for consumers’ attention again. Longer-term investors think Alphabet’s non-ad businesses like Google Cloud – as well as other ventures like Waymo, DeepMind, and Verily – might now come to the fore. Very little of the potential value of those segments is currently reflected in Alphabet’s share price, so if new investors decide to take advantage of that oversight by buying up Alphabet’s shares, existing investors could be in for a windfall. | 