Can YouTube ad issues really dent Alphabet Inc stock?
Shares of Mountain View, California-based Alphabet Inc (NASDAQ:GOOGL) are down almost 4% this week after some advertisers started pulling out their advertising from Google’s display network. This was a result of the search engine company's programmatic advertising, which seemingly was not able to stop mainstream brand ads from appearing alongside extremist and offensive material. And the exodus continues with few more big names recently pulling out their ads from Google's YouTube platform for similar reasons as mentioned above. We had recently pointed out that shares of Alphabet Inc, the parent company of Google, could be headed for a near-term correction. So, is GOOGL stock headed much lower? Also, Google's latest ad woes have earned Alphabet Inc (NASDAQ: GOOGL) stock an analyst rating downgrade as well. Should investors be worried? Let's take a closer.What are the Analysts saying?
The latest YouTube ad woes don't seem to have gone down well with investment firm Pivotal Research. Brian Wieser, Pivotal Research analyst downgraded GOOGL stock to Hold rating from Buy. The reason cited for the downgrade was the lack of control over ad placement on YouTube and the fact that this issue was being cited by major advertisers to withdraw their ad campaigns from the YouTube platform. Brian Wieser opines that Google may have done serious harm and that this could have global repercussions. On account of this, he reduced their "forecasts for Alphabet by approximately one percentage point for this year and the next. He cut his 2017 estimates to $107.9 billion in revenue and $40.75 per share in net income from a prior $108.8 billion and $24.4 billion." He slashed his Alphabet Inc (NASDAQ: GOOGL) stock price target from $970 to $950, which still has more than 13% upside from yesterday's close.
However, another Brian does not seem to go down Brian Wieser's way. A Valuewalk post reports that Morgan Stanley analyst Brian Nowak in his latest research note reiterated his Overweight rating and $1,000 price target on GOOGL stock. While he was quick to add, based on his interactions with all participants of the advertising industry, that the ongoing YouTube issue was a real concern for the search giant, he is of the view that impact on the stock would be minimal. He states that "the affected businesses make up 21% of the company’s gross revenues, with YouTube at 12%, and 10% of net revenues" and "if 10% of Alphabet’s gross revenue disappears, it would only drain 1% of its net revenue." Brian Nowak further adds that the advertisers pulling out are "only doing it from YouTube and the Google Display Network, and not from its other properties". He estimates that display ads constitute only 10% of the company’s net revenues and finally highlights that "the company’s revenues are diversified across millions of clients – with the top 100 ad spenders likely representing less than 20% of total ad revenue."Google is expected to continue its dominance in digital ad space.
In its latest research report, eMarketer states that the search giant will maintain its dominance in digital ads taking in 40.7% of US digital ad revenues in 2017—more than double of what Facebook (NASDAQ:FB) would make. The eMarketer research "expects Google’s share of the search market to grow 16.1% to $28.55 billion in 2017. The search giant will claim roughly 78% of total US search ad revenues this year". eMarketer forecasting analyst Monica Peart states that Google is set to benefit greatly from users' behavioral shift to mobile search on increasing usage of smartphones. An important point to note here is that the ongoing ad fiasco is largely related to Google's Display Network, where Google lags Facebook by some distance, but in that too eMarketer projects Display Network revenue will rise to $5.24 billion in 2017. The above-cited research had just come recently before the YouTube ad exodus. However, as highlighted by the Morgan Stanley analyst above, the impact on the Google's bottom line due to current ad woes could be minimal and the above estimates may not vary in a drastic way.Google is still the best.
Google is not the only internet company that is facing issues with programmatic ad buying, Snap Inc (NYSE:SNAP) and Facebook have had their own share of such issues in the recent past. In response to this whole issue, Google has come out with a public apology through Google's Europe head, Matt Brittin in his address at Advertising Week European conference in London. It also promises to give advertisers more control over where their ads run and make it easier to report any problems such as the recent ones. Paul Verna, principal analyst with eMarketer opines that "Google needs to sit down with the advertisers that are pulling their ads and reassure them that they're doing more than just issuing an apology. Beyond that, they're going to have to put some other level of human interface into the system, which may be easier said than done because they're handling an almost unimaginable stream of content."
Eric Schiffler, CEO of digitalmarketing.com as quoted on ThStreet.com conceded that "Google is still the smartest and the best solution for the great aggregated and targeted traffic, but they have to get their act together". A Wall Street post also echoes similar views that big advertisers will return to Google, but the latter needs to be cautious in the way it deals with this issue, otherwise, it may be stung hard. It is still early days to write off Alphabet Inc (NASDAQ: GOOGL) stock on account of the current YouTube crisis.Conclusion.
In spite of the current YouTube issues, GOOGL stock still looks an attractive investment for long-term investors. Google continues to deliver double-digit revenue growth despite its massive revenue base. It is widely anticipated now that Google Cloud would be catching up with Amazon's (NASDAQ:AMZN) AWS and that could be a tailwind for GOOGL stock going ahead. A leading technical indicator, Bollinger Band, suggests that Google stock is set for rebound as it is deemed to be oversold. For now, Alphabet Inc (NASDAQ: GOOGL) shares have hit the lower Bollinger band, indicating that the stock is currently in oversold territory, and could rebound soon. Taking a long-term view, Google stock is still a good bet for 2017.
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