Alphabet is sending shivers through the digital ad sector as growth slows

Alphabet sent shivers through the world of digital advertising and e-commerce when it reported an unexpectedly sharp slowdown in its core search advertising business, triggering a sell-off in tech stocks and fueling fears of a US economic downturn.

Revenue at the largest U.S. digital ad seller rose 6 percent to $69.1 billion in the third quarter. That was the slowest growth rate in more than two years and missed analysts’ expectations of 9 percent, according to Refinitiv.

“This is a bad sign for digital advertising in general,” said Evelyn Mitchell, an analyst at Insider Intelligence. “This disappointing quarter for Google means we are in for tough times as market conditions continue to deteriorate.”

Alphabet shares fell 6.3 percent in after-hours trading on Tuesday after lackluster results sent shares of other tech companies, including Meta and Amazon, down 3.5 percent and 1.4 percent, respectively. Microsoft, which also reported earnings on Tuesday, fell 2 percent.

Google Search revenue rose 4.2 percent to $39.5 billion, missing forecasts for 8 percent growth. YouTube advertising revenue fell 2 percent to $7.1 billion, compared with analysts’ expectations for a 4.4 percent increase. It was the first drop in YouTube ad sales since the company began reporting its performance separately in 2020.

Alphabet reported diluted earnings per share of $1.06 for the quarter, up from $1.40 in the same period last year and below the $1.25 that analysts were expecting.

The poor results were the latest sign of a slowdown in digital advertising and the world’s largest economy more broadly, as consumers and businesses cut back on spending amid a sharp rise in inflation. Marketing budgets are often the first port of call for companies trying to cut costs.

Earlier on Tuesday, a closely watched measure of consumer confidence fell to its lowest level in more than a year. The Conference Board’s so-called current situation index fell to 138.9, the weakest reading since April 2021.

Lynn Franco, senior director at The Conference Board, said the sharp drop in the index indicated that economic growth had slowed at the start of the fourth quarter and called consumer expectations “gloomy.”

Spotify, the streaming audio group that counts the US as its biggest market, said on Tuesday that a “difficult” economic environment also weighed on ad sales in the third quarter, leading to a wider loss despite strong growth in its core subscription business.

And last week, shares of Snapchat’s parent company lost almost a third of their value in its wake said advertisers continued to cut marketing budgets due to inflation and rising costs.

Revenue at Alphabet’s fast-growing Google Cloud unit rose 38 percent to $6.9 billion, but the unit still posted a net loss of $699 million, compared with a loss of $644 million a year earlier.

Alphabet Chief Executive Sundar Pichai told investors the group is “sharpening our focus on a clear set of products and business priorities.”

The strong U.S. dollar reduced revenue growth by 5 percentage points, according to Ruth Porat, chief financial officer, who said the company was “working to reallocate resources to fuel our highest growth potential.”

Alphabet’s earnings set the stage for Facebook parent Meta to report results on Wednesday, with analysts expecting third-quarter revenue to fall 5 percent.

Additional reporting by Anna Nicolaou