Alphabet sees drop in core Google advertising revenue

Organic Search

In the final quarter of 2023, Alphabet, the parent company of Google, reported a significant miss in predicted advertising revenue, which triggered a more than 5% drop in Alphabet stock during after-hours trading. Despite narrowly surpassing overall revenue predictions at $86.31 billion, compared to the expected $85.36 billion and marking a 13% YoY increase, the shortfall in the key advertising sector overshadowed the positive outcome.

The predicted advertising revenue was $65.52 billion, falling slightly short of the expected $65.8 billion. Despite this setback, Alphabet’s Chief Financial Officer expressed confidence in the results, emphasising a commitment to cost-base restructuring amid ongoing investments to fuel growth opportunities.

The lukewarm response from investors follows the recent layoffs of 1,000 employees, hinting at potential concerns about Alphabet’s cost-cutting strategy in the face of rising interest rates.

Analysts noted that the recent layoffs had initially heartened investors, who viewed them as strategic moves to optimise costs. However, the impact of these layoffs is not negligible, as Alphabet anticipates severance expenses of $700 million in the first quarter of 2024. The company recorded $2.1 billion in severance-related charges for 2023, along with $1.8 billion in charges related to vacating office locations.

Why is this important?

Despite the overall advertising slump, Alphabet highlighted positive results in other areas.

YouTube advertising revenue, for instance, reached $9.2 billion, surpassing the approximately $8 billion reported for the same period in 2022 and beating analyst predictions of $9.16 billion. Alphabet’s CEO, Sundar Pichai, expressed satisfaction with the “growing contribution from YouTube” and noted that the company’s digital subscription services, including YouTube and Google One, generated $15 billion for the year.

The earnings report also emphasised Alphabet’s increasing focus on artificial intelligence (AI).

Pichai highlighted plans to integrate the new AI model, Gemini, across various products, including search, advertising, and cloud services. This strategic emphasis on AI reflects Alphabet’s efforts to diversify revenue streams, particularly as its core search advertising business faces stagnation and growing threats from antitrust lawsuits. The U.S. Justice Department has sued Google for allegedly monopolising digital advertising technologies, and the company is slated to stand trial over charges related to advertising market dominance. As Alphabet navigates these challenges, its commitment to AI integration appears central to its strategy for sustained growth and adaptability.