Key points to remember:

  • Even though there is negative sentiment for the second quarter, ad spend is expected to increase in 2024.
  • Google is serving more and more ads to a wider audience with the growth of YouTube.
  • Cloud growth should be given more consideration, as it can offset any revenue decline and be a high value segment for Google.

After Snap inc. (NASDAQ:SNAP) issued weak forecasts, investors reduced their positions in advertising platforms such as Alphabet Inc. (NASDAQ: GOOGL). The question remains whether advertisers are experiencing a temporary crisis or whether their business is going to be limited for longer.

In this analysis, we will consider the possible evolution for advertisers, and we will assess what can differentiate Google from other platforms.

To quickly recap, we’ll look at Google’s position as an advertiser. Google’s main source of revenue is “intent-based” advertising through the search engine. It means that Google associates users with things they are actively looking for. Advertisers bid for positions in search results and Google generates revenue per click. This makes Google dependent on marketing spend (digital ads) from businesses. While estimates on this vary, we can get a general picture by looking at expectations for future ad spend.

In the chart below, we see the ad spend projections through 2024:

Statista: projected ad spend 2000-2024, retrieved May 30, 2022

The key takeaway is that while there may be a temporary tightening of marketing budgets, the advertising spending in the future is expected to increase furtherand Google will earn part of this budget.

The next step in our analysis is to determine if there are any factors that would put Google in a better position in the future. At least two aspects can be considered here:

  1. competitor of Google, Meta (NASDAQ:FB) was hit by the iOS tracking opt-in mechanism, which reduces the effectiveness of Facebook’s ad targeting. If this proves to be a persistent problem for FB, then Google may be able to recoup the remaining ad spend..
  2. YouTube’s ad revenue appears to be growing at 14.3% annually, giving Google a second leg to grow the ad business. YouTube’s advertising model is more like a social network, allowing Google to cater to advertisers with different needs and target audiences.

The previous two points focused on advertising, but Google is increasingly showing its presence as a key cloud provider. In the last quarter, it managed to increase cloud revenue by 44% year-on-year as the company offers its cloud services to large enterprise customers.

That leaves us to wait for the next few quarters and see if Google achieves growth. However, for investors who believe the company will recover, now is a great time to dig deeper into the fundamentals.

Analyzing Google’s Growth

Another way to get a clearer picture of the company is to look at how analysts expect Alphabet to perform in the future.

The graph below indicates a slight deceleration in growth in 2022, but a continuation of it nonetheless. This indicates that investors may be overreacting to a market decline as fundamentals remain resilient and may even end up being offset by cloud revenue growth.

See our latest analysis for Alphabet

earnings-and-revenue-growth
NasdaqGS: GOOGL Earnings and Revenue Growth May 30, 2022

With that in mind, we wouldn’t be too quick to come to a conclusion on Alphabet. Long-term earnings power is much more important than next year’s earnings. At Simply Wall St, we have a full range of analyst estimates for Alphabet out to 2024, and you can view them for free on our platform here.

Conclusion

Macroeconomic trends and analyst forecasts indicate that Google is well positioned for continued growth. Ad revenue for 2024 is still on the rise, and Google could claw back some of Facebook’s diverted advertisers.

The company is also focused on the cloud segment, and this is arguably where the company has a lot of potential to grow compared to peers like Microsoft and Amazon.

Investors can examine what the expected growth rates mean for the company’s intrinsic value in our report.

Remember that there may still be risks. For example, we have identified 1 warning sign for Alphabet of which you should be aware.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.