Advertising slump sinks Google investor confidence despite overall high revenue
The tech giant beat revenue predictions for the last quarter of 2023 but failed to deliver on predicted advertising revenue.
Despite narrowly surpassing overall revenue predictions for the fourth quarter of 2023, Alphabet’s stock experienced a decline of more than 5% in after-hours trading on Tuesday. This downturn was attributed to the tech giant falling short in its crucial advertising sector.
The parent company of Google revealed a miss on the anticipated advertising revenue, reporting $65.52 billion compared to the expected $65.8 billion. However, Alphabet exceeded predictions for overall revenue, recording $86.31 billion against the estimated $85.36 billion, marking a 13% year-over-year increase.
Although the company’s chief financial officer emphasized the strength of the overall revenue beat, the market’s response was lukewarm. She expressed the commitment to re-engineering the cost base while strategically investing to support growth opportunities.
This subdued reaction follows the announcement of Alphabet laying off 1,000 employees in January, as reported by the Alphabet Workers Union. In a subsequent statement, Chief Executive Sundar Pichai hinted at more layoffs in 2024 as part of the company’s refocused efforts on “investing in our big priorities,” particularly emphasizing the infusion of artificial intelligence elements into Google’s flagship products.
Analysts suggest that recent layoffs have buoyed investor confidence, interpreting the downsizing as a strategic move to enhance cost efficiency in response to escalating interest rates. However, the impact of these layoffs is palpable, as reflected in the disclosure made by Ruth Porat during an earnings call on Tuesday. Porat indicated that severance expenses are projected to reach $700 million in the first quarter of 2024. In 2023, Alphabet incurred severance-related charges of $2.1 billion and $1.8 billion in charges associated with vacating office spaces.
Despite an overall downturn in advertising, Alphabet reported a notable uptick in YouTube advertising revenue, reaching $9.2 billion, surpassing the approximately $8 billion recorded in the same period in 2022. This performance exceeded analyst predictions, which had estimated YouTube advertising revenue at $9.16 billion.
Alphabet’s Chief Executive Officer, Sundar Pichai, conveyed satisfaction with the “growing contribution from YouTube” in a statement accompanying the earnings report. Pichai also highlighted the success of the company’s digital subscription services, encompassing YouTube and the cloud storage platform Google One, which collectively generated $15 billion in revenue for the year.
Embracing the pervasive influence of artificial intelligence (AI) in the tech industry, Alphabet, like many of its counterparts, has pivoted to leverage the AI surge ignited by tools such as ChatGPT from Microsoft-backed firm OpenAI. The earnings call on Tuesday reflected this strategic shift, with the term “AI” mentioned over 70 times. Pichai underscored Alphabet’s commitment to integrating its latest AI model, Gemini, across various products, spanning search, advertising, and cloud services. This strategic move positions Alphabet to harness the potential of AI innovations across its diverse portfolio of offerings.
