In the decade leading up to 2022, Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) rewarded investors with a massive price return based on tremendous growth in its revenue and earnings. However, it was an unpredictable for tech giants as they experienced a plunge into the red in the presence of macroeconomic adversities.
Online search and advertising leaders' revenue and earnings growth followed a downtrend caused by a dried-up digital advertising industry. As a result, Alphabet delivered the slowest revenue growth in the fourth quarter of 2022 (only 1% to $76.05 billion). In addition, the higher inflation and unfavorable foreign exchange movements have caused significant damage to the revenue generated abroad, as revenue growth is 7% under a constant currency measure. Lastly, advertising revenue experienced a decline of 3.59%, while cloud computing revenue increased 32.01% on a year-over-year basis.
The decline in Alphabet's ad revenue is an inevitable outcome of an industry-wide slowdown in spending. Further, it is expected that the company can experience a slight decrease in its U.S. digital ad revenue, from 29.7% in 2022 to 28.8% in 2023, according to Insider Intelligence.
Source: insiderintelligence.com
An optimistic view on ad revenue growth is supported by the ongoing boost to Alphabet's ad business through the e-commerce features targeting Amazon.com's (AMZN, Financial) dominance over the product search space. In addition, the newly launched Performance Max advertising platform automates buying across multiple platforms such as YouTube, ad display, web search, maps, Gmail and other applications and optimizes advertisers' campaigns across Google's entire ad inventory.
Undoubtedly, Google will continue to dominate the search space. As of December 2022, 84% of the global search market was under the virtual monopoly of Google. It signifies a long-lasting opportunity for Alphabet to generate more ad revenue. Without immense changes in the search engine market, Google's dominance will remain undisputed in 2023. Once the economy recovers, the apparent boost in digital advertising will help the company to rebound effectively.
Enhancing cloud market share
The cloud business has been Alphabet's largest growth driver in recent years. As a result, Google Cloud's market share has improved significantly, becoming one of the major global providers. The company's cloud revenue increased by 36.83% in 2022 to $26.28 billion. It has become the third-largest cloud provider worldwide, just behind AWS and Microsoft Corp.'s (MSFT, Financial) Azure.
Source: techcrunch.com
As per Meticulous Research, the cloud market is expected to hit $1.40 trillion by 2030, a 16.8% compound annual grwoth rate. Despite the operating loss of $480 million, its cloud business will continue to support top-line growth for the company. Moreover, considering Amazon's operating income of 28.52%, Google Cloud can achieve exceptional margin levels over the long term, improving Alphabet's revenue and profitability. As a result, with its digital innovation and the widespread adoption of its cloud services, Alphabet can edge out the competition.
Code red
In recent weeks, a new threat has emerged. OpenAI launched ChatGPT, which optimizes language models to facilitate dialogue-based interactions. The technology could transform global industries, including online advertising and internet search.
Thus, ChatGPT can harm Alphabet's advertising model, which depends on businesses paying to stay at the top of search results. While the extent of its impact cannot be measured precisely, considering the efficiencies of the U.S. stock market, if investors perceive any significant harm to Alphabet's search monopoly, the stock could have plunged substantially after ChatGPT's launch.
Regulatory challenges
Alphabet's core advertising business faces multiple threats, with the U.S. Department of Justice pushing the conglomerate to segregate its ad-technology business to neutralize the market's monopolization. To that effect, the DOJ filed antitrust charges against Alphabet on Jan. 24, the second antitrust case in two years. The European Union also challenged Alphabet's dominance in digital advertising on antitrust grounds, which led to three fines totaling $9.3 billion.
As a result, these charges breed the possibility of a divestiture of its advertising business for compliance with regulators.
Concentration on AI and quantum computing
After Google's artificial intelligence chatbot, which is called Bard, let investors down during its introduction on Wednesday by answering a simple question incorrectly, Alphabet's shares dropped more then 7%. As Microsoft is increasing the pressure with its new Bing AI features, the flub shows the tech giant could be at risk of falling behind the competition.
This would be a major blow to the company as Alphabet is relying on the application of AI and quantum computing to enrich its search and cloud businesses, including monetizing YouTube shorts. Further, advancements in these areas will strengthen its digital advertising, cloud platform, YouTube, consumer products, voice-based search, virtual reality and other bets.
Concluding thoughts
