Google advertising push generates record profit for Alphabet

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Google owner Alphabet on Tuesday reported higher-than-expected ad sales in the third quarter, a sign that the company is overcoming new limits in mobile user tracking and online shopping is more popular than ever at the approach of the end of year holidays.

Thanks to its search engine, YouTube video service, and web partnerships, Google sells more internet advertising than any other business. Demand for its services has increased over the past year as the pandemic forced people to spend more time online and their new habits persisted.

Google’s ad revenue rose 41% to $ 53.1 billion (roughly Rs. 3,980,010 crore) in the third quarter. Alphabet’s overall sales jumped to $ 65.1 billion (roughly Rs. 4 87,730 crore), above the average estimate of $ 63.3 billion (roughly Rs. 4 74,250 crore) among analysts monitored by Refinitiv.

“The digital shift of consumers is real and will continue even as we start to see people returning to stores,” said Philipp Schindler, chief commercial officer at Google. “The underlying takeaway is that people want more choice, they want more information, more flexibility, and we don’t see that being reversed.”

The shares fell 0.93% to $ 2,760.19 (around Rs. 2 lakh) after the after-hours financial results were released.

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Quarterly profit was $ 18.936 billion (around Rs 1,860 crore) or $ 27.99 (around Rs 2,100) per share, beating expectations of $ 24.08 (around Rs 1,800) per share and marking a third consecutive quarter of record profits. Alphabet’s profits are subject to large fluctuations as accounting rules require the company to measure unrealized gains from its investments in startups as income.

Investors had prepared for some selling challenges for Google.

Consumer concern about how Google and other companies use their surfing behavior to profile them and then choose which ads to serve has grown. In the latest challenge, Apple, whose iPhone devices make up half of all smartphones in the United States, has given its users more control to stop tracking in recent months. The change led advertisers to recalibrate their spending to make Google rival Snap, and Facebook said it hurt their sales in the third quarter.

Regulatory control

Alphabet CFO Ruth Porat reported a “modest impact” on YouTube ad sales thanks to Apple’s efforts. But analysts said Google overall was less affected than its peers because its search engine collects user interest data that is valuable to advertisers and unmatched in the industry.

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“They are almost completely immune to Apple’s changes,” said Collin Colburn, analyst at technology consultancy Forrester.

Other businesses have also faced downturns as advertisers slashed spending as they struggled to recruit staff and keep shelves fully stocked amid the hiring and supply chain challenges brought on by the pandemic. Schindler said supply chain challenges only affected Google’s auto ad sales.

Google Cloud, which tracks Amazon and Microsoft in cloud services market share, increased revenue 45% to $ 4.99 billion (around Rs 37,400 crore), slightly below estimates of 5.2 billion dollars (about Rs 38,980 crore).

Alphabet’s total costs rose 26 percent to $ 44.1 billion (roughly Rs.330,575 crore) in the third quarter, and the company’s headcount surpassed 150,000 employees.

Alphabet shares have outperformed those of many large peers since the end of last year, rising about 57%. Microsoft is up 39%, Facebook 20% and Amazon 2% over the same period.

But Alphabet shares are trading at a slight discount to Facebook, the Internet’s second-largest online ad seller. Facebook is trading at 6.8 times expected revenue over the next 12 months, compared to 6.4 times for Alphabet.

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In recent weeks, Facebook has been inundated with accusations from a former employee who leaked thousands of confidential company files to the media and filed complaints with the U.S. securities regulator about Alleged misrepresentation by the company about its risks of hosting inappropriate content.

Google has been caught in some of the fallout. A YouTube politician testified before the U.S. Congress earlier Tuesday alongside other companies about the harms of social media for young users.

Investors are also awaiting further changes in Google’s business following a regulatory review. US and other authorities have alleged that some of the company’s advertising and research practices are anti-competitive, although the company claims they benefit users. In a concession to critics last week, Google said it would reduce some of the fees it collects for apps on its Play app store starting next year.

But the move could end up generating new revenue for Google if it prompts companies like music streamer Spotify to start selling subscriptions through their apps and give Google 10-15% of the money.

Porat d’Alphabet said on Tuesday that earlier reductions in gaming fees would reduce sales.

© Thomson Reuters 2021


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