Alphabet earnings: Expect ‘continued weakness on YouTube,’ analyst says

Morningstar Senior Equity Analyst Ali Mogharabi joins Yahoo Finance Live to discuss the expectations for Google’s fourth-quarter earnings, trends to watch for across digital advertising, macro environment uncertainty, and the outlook for tech ad spending.

Video transcript

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- All right, advertising technology stocks took a hit across the board last year as economic uncertainties and falling valuations caused many companies to rein in ad spending. That's expected to weigh heavily on Alphabet, which could show up in the company's earnings later on this week. For more on this, let's get to Morningstar's senior equity analyst Ali Mogharabi. Ali, good to see you here. How bad do you think this impact or this trend will show up in Alphabet's earnings this week?

ALI MOGHARABI: Well, to a certain extent, yes. I mean, on YouTube, you could see continuing weakness on YouTube. However, I think search, we think search will be fine for the entire year for 2022 and also, of course, this year.

When there's uncertainty from a macro environment, search, a lot more advertising spending may be cut. However, increase in allocation towards search actually does increase because the users display their intention based on the query that they put in. So the more targeted advertising actually becomes more effective. And, therefore, it continues to attract advertisers. So there will be probably, there may be some weakness on the YouTube side but partially offset on the search side of their advertising.

- For some businesses that are also reporting this week, advertising is part of the fastest growing segment that they do have. And I'm particularly thinking about Amazon. Amazon does have a quickly growing advertising business over the past several years here. And then you think about Apple and their own throwing of the hat into the ring in advertising as well. How do you expect that to show up within their earnings reports, perhaps?

ALI MOGHARABI: Well, actually, I don't cover those two companies, Amazon and Apple. However, you are right. They continue to gain traction in the digital ad environment. We don't really expect them to actually displace Google as the leader in that market. However, they continue to gain market share in that environment.

I mean, Apple certainly has its data that it continues to utilize to make the ads, especially in its App Store, more effective. And, of course, with Amazon, you've got retail. And you've got a lot of brand and also targeted advertising available on that platform. So my colleagues estimate that they can probably continue to show growth in the ad side of the business.

- So, Ali, let's take a step back here because you put out a report earlier in the month where you looked at the total-- you have total forecast for ad spend this year. You're looking at growth of 7.9% total, 8.6% in digital specifically. So how would you characterize that? That represents a rebound, right?

ALI MOGHARABI: Yes. It represents a slight rebound. We don't expect basically a recession in 2023. And that's Morningstar estimates. However, the macro, overall macro uncertainty does slow it down a little bit.

I think the key point that we were making in that report is that we expect continuing deceleration in growth of digital advertising. And there are a couple of reasons. One, as I mentioned earlier, there is macro uncertainty.

And then the second is, if you think about it, we're no longer in that early or actually complete growth stage of digital advertising. We've seen transition from traditional onto digital pretty much nearly complete. By our estimates, we think around 70% of ad spending last year represented digital advertising. So, again, there's not that much more transition to take place. And, therefore, we will see continuing deceleration in digital advertising growth.

- So you're looking at some ad tech companies that you track. Given that deceleration, and I know you said these guys still have some opportunities, why do they still have opportunities, even if things are slowing down?

ALI MOGHARABI: Well, they have opportunities because some of the larger players are actually facing some pressure, whether it's from a regulatory standpoint, data privacy and so forth. And also there is an increase in first-party data utilization. So some advertisers actually may consider more independent players, nonwalled garden players, as more attractive to do business with.

Some of those names that come to mind include PubMatic, Magnite, The Trade Desk, and LiveRamp. And out of those currently-- of course, LiveRamp has performed pretty well since we published. But out of those currently, PubMatic and Magnite appear to be more attractive for us in our view from a valuation standpoint. We think they do have more upside.

So, overall, for smaller adtech players, smaller with respect to Alphabet or Google, of course, we think there are some opportunities, especially in the digital side of the business. When you're talking about connected TV, I think that part of digital advertising is actually growing pretty nicely.

And then keep in mind, for example, the lawsuits that were filed by the DOJ and eight states last week against Google, where there could be a possibility of a forced spin-off. Of course, that remains to be seen. It will take a couple of years for that to take place. But with additional pressure on some of the larger players, such as Google, again, some publishers may actually look more towards some of the other adtech providers.

- Who is the--

ALI MOGHARABI: So those are some of the catalysts that we see.

- Yeah, who is the big winner if that is effective or if there is a forced spinoff that Google or Alphabet has to consider?

ALI MOGHARABI: Well, that really depends. I mean, there are still a lot of-- the adtech market is still fragmented, even with a lot of consolidation that we've seen during the past few years. But we think the ones that could take advantage of it still remain The Trade Desk, PubMatic, Magnite. And from a data standpoint, an independent one would be LiveRamp.

- All right, Morningstar Senior Equity Analyst Ali Mogharabi, thank you so much for joining us here this morning. We appreciate it.