The explosive growth Google Cloud enjoys is masking Alphabet‘s (NASDAQ:GOOG)(NASDAQ:GOOGL) problems with Google Search and at YouTube. Because of the company’s insatiable appetite for revenue, it is abusing its market power, which will undermine the strong foundation it has built elsewhere in its business.
Advertising revenue has become all-consuming for Google, and it is beginning to feel the backlash. The tech giant has now reported two consecutive quarters of slowing growth in ad sales and its market share in search ads is expected to fall below 50% next year.
Although competition for ad dollars from Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and elsewhere is certainly a growing problem, Google only needs to look in the mirror to find another culprit.
24/7 Wall St. Insights:
- Despite the growth of Google Cloud, Alphabet’s pursuit of advertising revenue is suffering a slowdown as competition and a potential viewer backlash as ads dominate search and streaming.
- The user experience is diminishing because of the proliferation of ads, causing a decline in ad revenue growth for two consecutive quarters.
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Growth is shifting from ads to the cloud
Alphabet reported $88.3 billion in third-quarter revenue, up 15.1% from last year and better than the 14% increase it saw in the second quarter. However, Google Cloud was responsible for the better year-over-year gains.
The cloud business saw revenue surge 35% to $11.4 billion, well ahead of the 28.8% growth witnessed in the prior quarter. As data center and hyperscaler demand for artificial intelligence increases, Google Cloud is becoming the beneficiary.
The segment is the smallest of the three major cloud computing platforms, trailing Amazon Web Services and Microsoft’s Azure, but it is seeing faster growth. The trio represent 64% of the total $84 billion enterprise cloud infrastructure market and AWS leads the way with a 32.7% share. Second is Azure at 28.7% while Google Cloud is third with a 13% share.
But Alphabet’s advertising business is beginning to falter, and it is only not highlighted more because of the growth seen in cloud computing.
A growing pushback
As more ad platforms flood the market, Google is pushing more ads across its own platform. The top-of-fold space on the computer screen, for example, is now dominated by sponsored ads, forcing users to scroll to receive unpaid content.
It is making good use of its AI integration on the search results page to create greater user interaction and engagement, but the all-out push for ad revenue is degrading the overall experience.
Similarly, YouTube’s ad growth sank to 12.2% growth from 13.8% in the second. Google may quickly learn that less is really more.
As competition for ad placement heats up, Google has been cramming more ads onto YouTube. Particularly with its TV app, it is not uncommon to be forced to sit through 30 seconds, 45 seconds, or even 60 seconds worth of unskippable ads. While ostensibly it is to negate the need to run more ads throughout a video, you can still encounter multiple long ad runtimes in a single video. And then immediately get more when the next video starts. Google is ruining the viewer experience by also cracking down on the use of ad-blockers.
Cluttering the user experience
Alphabet saw total ad sales hit $65.9 billion in the third quarter, up 10.4% year-over-year, but down from the 11.1% gains in the second. That was due to search ad growth rates falling from 13.8% in the second quarter to 12.2% in the third, as Google brought in $49.4 billion in search advertising.
Google’s greed for more ad revenue could seriously undermine Alphabet’s overall growth trajectory. It is already impacting its stock price, which remains 11% below its all-time high set in July. The market wasn’t pleased with Alphabet’s performance, especially in the ad sales department, but the situation might not improve anytime soon.
Alphabet likely won’t crumble, at least not yet as it remains a dominant player, but pushing ads into the face of users and viewers at every turn risks keeping the stock stalled.
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