Google stock rises despite an ad downturn, second straight earnings decline

Shares of Alphabet Inc.’s Google popped more than 4% in extended trading Tuesday after the tech behemoth reported results slightly lower than Wall Street estimates.

Still, the results marked the second straight quarter of year-over-year earnings declines for Google — its first since 2015, but this time on a much larger scale.

Alphabet GOOGL,
-2.32%

GOOG,
-2.56%,
the most dominant digital-advertising player, reported net income of $16 billion, or $1.21 a share, in its fiscal second quarter, compared with net income of $18.5 billion, or $1.36 a share, in the same quarter last year. (Google recently completed a 20-for-1 stock split, and previous results are revised as a result.)

The results, while not eye-popping, may have mollified investors rattled by poor quarterly results last week from two other ad-dependent companies, Snap Inc. SNAP,
-3.22%
and Twitter Inc. TWTR,
+0.25%.
Facebook parent company Meta Platforms Inc. META,
-4.50%
is scheduled to report its second-quarter results Wednesday.

“Google’s earnings miss this quarter proves it’s not immune to the challenges facing the digital advertising industry at large,” Insider Intelligence analyst Evelyn Mitchell said. “Once again, Google’s search and cloud businesses bolstered its overall performance while YouTube growth slowed to a crawl amid tough competition from TikTok and other players in the video-streaming space. It would have been tough to outperform its earnings [last year]but it’s clear Google has its work cut out for it in the back half of the year.”

Google’s revenue after removing traffic-acquisition costs was $57.5 billion, compared with $51 billion in the year-ago period. Overall revenue improved 13% to $69.7 billion. Analysts surveyed by FactSet had estimated net income of $1.27 a share on ex-TAC ​​revenue of $57.6 billion and total revenue of $69.8 billion.

Profit declined 15.6% year-over-year in the quarter, after 8.3% in the first quarter; Google last saw earnings decline in two consecutive quarters in the first two quarters of 2015, when the declines came in at 2.3% and 1.8%. Alphabet’s operating-profit margin was 28% in the quarter, down from 31% in the year-ago quarter.

“In the second quarter our performance was driven by Search and Cloud. The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term,” Alphabet Chief Executive Sundar Pichai said in a statement announcing the results.

During a conference call on YouTube late Tuesday, Pichai revisited his recent comments that Google is keeping a keen eye on hiring and spending as it and other Big Tech companies navigate what he calls a “dynamic” macro environment of inflation, supply-chain and inventory constraints, the war in Ukraine and fear of recession. “We view it as an opportunity to sharpen focus” operations and invest in long-term growth, Pichai said.

Google’s Chief Business Officer Phillip Schindler suggested travel ads remain a challenge, and that some advertisers have scaled back on spending.

Google Chief Financial Officer Ruth Porat added that the company will not cut back on data-center spending, and servers will be its biggest capital expense. She, too, pointed at a “pull back” in name spending for dinging revenue.

Read more: Google may be the safest of the digital-advertising giants, but that isn’t saying much right now

Google’s total advertising sales rose to $56.3 billion from $50.4 billion a year ago. Search was $40.7 billion, etc. $35.8 billion a year ago.

YouTube ad sales continued to grow but not as quickly, to $7.34 billion from $7 billion a year ago.

Google’s Cloud revenue jumped 37% to $6.3 billion but it is slowing; Google Cloud is believed to be third in cloud sales behind rivals Amazon.com Inc. AMZN,
-5.23%
and Microsoft Corp. MSFT,
-2.68%.
Pichai acknowledged during the analyst call that the market is still in its early stages, but some customers have been recently impacted in their ability to spend or taking longer sales cycles because economic macro trends.

Google has perhaps benefited from not offering guidance on its financial results, a practice it has followed for years, sparing it from the outsize expectations of Wall Street.

“With its tremendous market share in search advertising, Google is relatively well-positioned to weather the rough waters that lie ahead as advertisers prioritize lower-funnel tactics,” analyst Mitchell said.

Google’s stock has skidded 27% so far this year. The broader S&P 500 index SPX,
-1.15%
is down 18% in 2022.

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