Google reports slowest revenue growth in nearly 10 years

Shares of Alphabet, Google’s parent company, are down sharply after the company’s latest earnings report revealed the slowest quarter for revenue growth in nearly a decade.

Google’s year-over-year (YOY) revenue growth is on the rise 6%the smallest increase since 2013, apart from a month during the pandemic.

It might sound like a good thing that Google’s revenue is up overall, but the problem becomes apparent when you compare it to last year’s growth of 41%.

Google’s operating margin is down 32% last year at 25% this year, and net income is down 36% I.

While Google fell short of expectations, revenue and earnings per share (EPS) were weaker than analysts expected.

As the data below illustrates, the only category where Google exceeds estimates is cloud revenue:

  • PES: $1.06 vs. $1.25 expected (according to Refinitiv estimates).
  • Revenue: $69.09 billion vs $70.58 billion expected (according to Refinitiv estimates).
  • YouTube ad revenue: $7.07 billion vs $7.42 billion expected (based on StreetAccount estimates).
  • Google Cloud revenue: $6.9 billion vs $6.69 billion expected (based on StreetAccount estimates).
  • Traffic Acquisition Costs (TAC): $11.83 vs $12.38 expected (based on StreetAccount estimates).

Prior to the earnings call, Alphabet was expected to post the weakest revenue growth in two years. This was the slowest revenue growth of any quarter since 2013.

Slowdown in Google and YouTube ad spend

The biggest news on the revenue call is the deceleration in Google’s digital ad revenue.

Google’s digital ad revenue grew only 2.5% in the third quarter. At least it has increased, because the same cannot be said for YouTube.

YouTube ad revenue fell to $7.07 billion, down 2% year-on-year and missing analyst expectations of $7.42 billion.

This is the first-ever decline in YouTube ad revenue since Alphabet reported it in 2019.

Ruth Porat, Alphabet CFO, said on the earnings call:

“During the second quarter earnings call, we noted lower spending by some advertisers on YouTube and Network, and those spending declines increased in the third quarter. In search and other, the most important factor part of the deceleration in the third quarter was to outpace the outsized performance of 2021. In the third quarter, we saw lower spend by some advertisers in certain areas and search ads. For example, in financial services, we saw a declines in insurance, lending, mortgage and crypto sub-categories.

YouTube ad revenue peaked at 84% in the second quarter of 2021. A year later, it fell to minus 2%.

The sharp drop in ad spend on YouTube and Google coincides with an equally steep decline in cryptocurrency prices.

This is worth noting, as Porat says crypto is a subcategory where advertisers are cutting back on spending.

Bitcoin hit record highs in 2021, around the time YouTube saw its strongest ever revenue growth. The cryptocurrency crashed in the second quarter of 2022, matching the decline in ad revenue reported by Porat.

And now?

In today’s economy, it’s understandable for companies to slow down their ad spend. A looming recession means a shift from capital spending to capital preservation.

If you’re running a monetized YouTube channel, your ad revenue may drop if you haven’t already.

Now is the time to start thinking about ways to diversify your income.

On YouTube, this may include selling products, offering channel subscriptions, or live streaming. These are all ways to make money without relying solely on ads.

It won’t surprise me if creators’ live stream revenue starts to outpace their ad revenue. Anecdotally, I’ve seen independent YouTube content creators make thousands of dollars per stream from money donated by viewers via Super Chats.

You can also start preparing for YouTube Shorts monetization in 2023. Getting familiar with creating entertaining and informative short videos can help your channel generate more revenue when rolling out Shorts ads.

Sources: CNBC, motley fool, Alphabet (PDF link)

Featured Image: FellowNeko/Shutterstock

Sallie R. Loera