Google’s core business is slowing down amid recession fears

New York
CNN Business

Google may be the giant in the digital advertising world, but even it is not immune to the impact that the economic downturn and recession fears are having on the online ad market.

Google parent company Alphabet (GOOGL) on Tuesday reported earnings results for the third quarter that fell short of Wall Street analysts’ estimates for both sales and profits, due in large part to a sharp slowdown in the growth of its core advertising business.

It reported revenue of nearly $69.1 billion, up just 6% from the same period in the prior year. Google’s advertising revenues grew just 2.5% year-over-year, compared to the 43% growth it posted a year ago. YouTube’s ad business, which competes with TikTok, was especially a hard hit, with revenue declining nearly 2% from the year-ago quarter.

Google’s net income, henceforth, came in at $13.9 billion, down more than 26% from the year prior and well below the $16.6 billion analysts had projected.

The company’s shares fell 6% in after-hours trading Tuesday following the report.

Sundar Pichai, CEO of Alphabet and Google, nodded to the tougher economic climate in a statement included with the results.

“We’re sharpening our focus on a clear set of product and business priorities,” Pichai said. “We are focused on both investing responsibly for the long term and being responsive to the economic environment.”

Tech companies, including Google, reported that they’d started to feel the impact of declining online ad spending in the prior quarter. High inflation, looming recession fears and the ongoing war in Ukraine have all continued to weigh on the industry.

Growth in other areas of Google’s business also appear to be slowing. Google Cloud revenue grew 37% year-over year, a deceleration from the nearly 45% growth it posted in the year-ago quarter, and the segment’s net loss increased to $699 million from $644 million during the same quarter last year.

Net loss from Google’s “Other Bets” segment, which includes business efforts such as its self-driving car unit Waymo, also accelerated year-over-year during the quarter to $1.6 billion.

“Google delivered a disappointing quarter with the search giant underperforming our expectations across almost all business units, most importantly its core ad search segment,” said Senior Analyst Jesse Cohen.

During a call with analysts Tuesday, Pichai said the company has begun “realigning resources to invest in our biggest growth opportunities.”

“Over the past quarter, we have made several shifts away from lower priority efforts to fuel highest growth priorities,” Pichai said, adding that the company plans to cut back on headcount additions during the final three months of the year.

Google CFO Ruth Porat said on the call that strong growth in the fourth quarter of 2021 will make year-over-year ad revenue growth comparisons to the current quarter difficult, and that the strength of the US dollar is expected to increase weigh on the company’s results. The company did not provide detailed financial outlook for the current quarter.