Google drops 7% on revenue miss due to fizzling ad business

While Microsoft saw a 72% increase in their cloud business, Google’s primary revenue engine appears to be running out of steam, with their Q1 2019 growth disappointing investors in today’s earnings announcement.

CNBC reports that Google missed analyst revenue expectations by $1 billion, resulting in $60 billion being wiped from Google’s market cap.

Alphabet, Google’s parent company, reported:

• Earnings per share: $11.90 per share, ex-items, vs. $10.61 expected, per Refinitiv survey of analysts
• Revenue: $36.34 billion, vs. $37.33 billion expected, per Refinitiv survey
• Traffic acquisition costs: $6.86 billion, vs. $7.26 billion expected, according to FactSet
• Paid clicks on Google properties: +39%
• Cost-per-click on Google properties: -19%

While Google’s business did not actually shrink, the slowing growth suggests this may be the destination in the future. Revenue increased 17%, down from growth of 28% a year earlier, and ad sales rose 15%, down from 24% a year ago.

According to Ruth Porat, Alphabet’s finance chief, most of the deceleration was due to YouTube, which “represents the vast majority of total clicks.” YouTube has recently been involved in a number debacles which has caused advertisers to repeatedly pull their inventory from the video service.

Given the faltering legacy ad business, Google is looking to its hardware and cloud businesses as new revenue centres. Google’s “other revenues” saw a 25% increase to $5.45 billion. In these areas, Google will be competing with Microsoft and Amazon, and the company is expected to continue to invest in capital expenditure, but at a slower rate than in 2018, according to Porat, in an attempt to catch up.

This is Google’s second disappointing quarter in a row and at the time of writing Google’s share price is down 7.27% in after hour trading.